Banker's Glossary



Banker's Glossary

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A

|ABO |See accumulated benefit obligation. |

|ABS |(1) Initials for asset-backed security. See asset-backed security. |

| |(2) The name for a convention used to express the rate of prepayments for an asset-backed security. ABS expresses |

| |principal prepayments as a percentage of the original number of loans or contracts in the pool of securitized loans that|

| |created the security. ABS is always expressed as a monthly rate. |

|absorption |A term used by real estate lenders and developers to describe the process of renting up newly built or renovated office |

| |space or apartments. The term "absorption period" is often used to describe the period of time necessary for absorption.|

|abstract of title |A written report summarizing the history of title transactions and conditions of title that affect a given piece of land|

| |covering the period from the present back to a date in the past. A comprehensive, but cumbersome, and somewhat obsolete,|

| |method of verifying the ownership and encumbrances of a parcel, or parcels, of real estate. |

|accelerated depreciation |A group of methods for achieving periodic reductions in the book value of fixed assets that make larger reductions in |

| |the early periods and progressively smaller reductions in later periods. The offsetting entry is the depreciation |

| |expense. |

|acceleration |Making demand for payment in full for a debt that has not yet matured. Usually a remedy provided in a loan document for |

| |the lender to use in the event of default by the borrower. |

|acceleration clause |A provision in a loan document stating that the entire amount of unpaid indebtedness owed to the lender may become |

| |immediately due and payable if the borrower defaults. |

|acceptance |A time draft that has been accepted for payment. See banker's acceptance. |

|accessions |Goods that are physically united with other goods in such a manner that the identity of the original goods is not lost. |

| |An example is a new motor in a piece of equipment. |

|accommodation maker |Name used to refer to a co-maker who agrees to sign a note to induce the lender to make a loan, but who receives no |

| |direct benefit from the loan. |

|account analysis |An analysis performed to determine the profitability of each demand account to the bank. The analysis may also be used |

| |to determine the profitability of a group of demand accounts with the same owner. Account analysis is normally performed|

| |by the bank, but can be done by anyone in the depositor's organization provided sufficient information is available. The|

| |analysis identifies the net earnings based on the average daily ledger balance less reserved requirements and float. The|

| |net earnings can then be compared with the various activity service charges based on the volume of transactions and the |

| |per item price of the services. |

|account control agreement |An agreement perfecting a creditor's interest in a securities account while allowing the securities to remain registered|

| |in the name of the owner. An account control agreement is used to establish a security interest conforming to the |

| |requirements set forth in the UCC. |

|account debtor |An individual or business that is obligated to pay on an account, chattel paper, contract right, or general intangible. |

|account reconciliation services |A cash management service. One or more of a series of bank services designed to aid a deposit customer in the |

| |reconciliation of its bank account balance. A basic account reconciliation service may simply be a listing of paid |

| |checks in serial number order. More advanced account reconciliation services combine electronic data provided by the |

| |customer with the bank's records to reconcile completely the account and list all outstanding items. Many variations |

| |exist. Also called account recs, ARPs, or recons. |

|accounts |A category of personal property defined by Article 9 of the UCC. Under the pre-2000 version of Article 9, an account is |

| |a right to receive payment for goods sold or leased, or for services rendered, where these rights are not evidenced by |

| |an instrument or by chattel paper. Under the revised Article 9, the definition of accounts is much broader. The revised |

| |definition covers a much wider variety of payment obligations, whether or not earned by performance, including license |

| |fees payable for the use of software, credit card receivables, and healthcare insurance receivables. |

|accounts payable |A category of liabilities that represents funds due to creditors. Usually, accounts payable is due to trade creditors |

| |who have supplied goods or services without requiring immediate payment. Accounts payable is sometimes simply called |

| |payables. Accounts payable to trade creditors are sometimes called accounts payable trade, due to trade, or trade |

| |payables. |

|accounts receivable |An asset account that reflects amounts due from private persons or organizations for goods and services furnished. For |

| |corporations, accounts receivable excludes funds due from departments, but may include funds due from affiliates. For |

| |governments and nonprofit organizations using fund accounting, it does not include funds due from other funds owned by |

| |the same entity. A category of personal property defined by Article 9 of the UCC. Accounts receivable is the right to |

| |receive payment for goods sold or leased or for services rendered where those rights are not evidenced by an instrument |

| |or by chattel paper. |

|accounts receivable - trade |Also called trade receivables. Amounts due from the credit sales of goods or services that are not evidenced by |

| |promissory notes. |

|accreting swap |An interest rate swap with an increasing notional amount. |

|accretion |The process of making incremental, periodic increases in the book or carrying value of an asset. For example, when a |

| |bond is purchased at a price below 100, the difference between the purchase price and the par value, the discount, is |

| |accreted. Discounts are usually accreted in roughly equal amounts that completely eliminate the discount by the time |

| |that the bond has matured, or by the call date, if applicable. |

|accretion bond |See Z tranche. |

|accrual basis |See accrual convention. |

|accrual bond |(1) Bonds that pay the investor an above-market coupon rate as long as a reference rate is between preset levels |

| |established at the time the security is issued. A type of structured note. Also called range bonds. |

| |(2) A type of CMO security that does not pay holders periodic interest in cash. Instead, periodic interest for these |

| |bonds is accrued. It is added to the principal amount due to the holder at a later date. See Z tranche. |

|accrual convention |Method used by investors for counting the number of days in each month and in the year. Also called accrual basis or day|

| |basis. The accrual convention is expressed in different ways. An accrual basis of 30/360 indicates that every month is |

| |treated as if it was 30 days long and a year is assumed to have 360 days. Accrual basis of actual/360 indicates that |

| |each month is treated using its actual number of days while a year is assumed to have 360 days. Day basis of |

| |actual/actual indicates that the true number of days for each month and year are used. The accrual convention is used in|

| |the calculation of the amount of interest payable on bonds, loans, deposits, and other financial instruments on the |

| |interest payment dates. This convention is also used for the purpose of calculating accrued interest due from a buyer to|

| |a seller of a security sold between interest payment dates. |

|accrued interest |Interest that has been earned but not yet paid. For example, the interest earned by a bondholder between semiannual |

| |coupon payments or the interest earned by a lender since the last monthly interest payment was collected from the |

| |borrower. Accrued interest for investment securities is calculated from the issue date or the last payment date up to |

| |but not including the settlement date. When a buyer purchases a bond, the buyer owes the seller the accrued interest in |

| |addition to the market price of the security purchased. |

|accumulated benefit obligation (ABO) |The actuarial present value of the pension benefits earned to date. Measurement of the accumulated benefit obligation |

| |uses the historical compensation rates for pay-related benefit plans. The ABO must be disclosed in a footnote to the |

| |financial statements. |

|accumulated depreciation |The total of the periodic reductions for depreciation in fixed assets. Also called allowance for depreciation. |

|accumulator |See capital appreciation bond. |

|ACH |See automated clearinghouse. |

|acid test ratio |Another name for the quick ratio. |

|active tranche |A REMIC tranche that is currently paying principal payments to its owners. |

|actual delay days |See delay days. |

|adjustable-rate mortgage (ARM) |A loan for which the interest rate (coupon rate) is adjusted periodically to reflect changes in a previously selected |

| |index rate. ARMs may have caps and floors that limit the annual and/or the lifetime change in the coupon rate. |

|adjusted duration |See option-adjusted duration. |

|adjusted trading |A practice used to sell securities without recognizing any or all of the true loss from that sale. To hide the loss, the|

| |investor agrees to overpay for a newly purchased security in exchange for the broker/dealer's agreement to overpay for |

| |the security that the investor wants to sell. The broker/dealer incurs a loss by purchasing the investor's underwater |

| |bond at an above-market price. At the same time, the broker/dealer offsets that loss by selling the investor a new bond |

| |at an above-market price. Thus the transactions are completely neutral from the broker/dealer's perspective. However, |

| |from the investor's perspective, the transactions effectively defer the recognition of losses on the security sold by |

| |establishing an excessively high book value for the security purchased. These transactions are specifically prohibited |

| |for federally insured financial institutions. They may also be illegal. Sometimes called fee trading. |

|administered rates |Interest rates that the bank or other payer is contractually permitted to change at any time and by any amount. For |

| |example, the rates paid on savings accounts. All interest rates can be categorized as either fixed, administered, or |

| |floating. Rates that may change at the payer's discretion are sometimes called variable rates, easily confused with |

| |floating rates, which change at contractually specified times by contractually specified amounts - a very different |

| |arrangement. |

|administrative float |Float resulting from the time it takes to administratively process checks or other related paperwork. Total elapsed time|

| |for processing checks can range from less than a day to more than a week. Note that its basic elements are present |

| |whether the work is done by the owner of the funds or the work is done by a bank or other lockbox vendor. Sometimes |

| |referred to as payment processing float or internal float, but since some of the sources of the float delay are not |

| |necessarily internal, the term internal float is not a completely accurate synonym. |

|administrative review |One of two types of real estate appraisal reviews. Administrative reviews focus primarily on the underwriting issues |

| |addressed in the appraisal. These reviews, usually performed by the loan officer, approach the appraisal from a loan |

| |underwriting point of view. Typical issues addressed in an administrative review include: How comparable are the |

| |comparable properties used in the appraisal? How reasonable are income and expense projections? Is the capitalization |

| |rate appropriate? See technical review. |

|ADR |See American depository receipt. |

|advance formula |A provision sometimes used in lines of credit as a sublimit on the maximum amount that can be borrowed. Typically, an |

| |advance formula limits the amount that can be borrowed under a line of credit to the lesser of the amount of the line or|

| |some percent of accounts receivable collateral. |

|Advanced Measurement Approaches (AMA) |One of three methods for quantifying capital required for operational risk under proposed Basel II capital rules. Banks |

| |using the Advanced Measurement Approaches must hold capital for operational risk based on a risk quantity generated by |

| |the bank's internal measurement procedures. The most common internal methods are self-assessments. See also |

| |self-assessment, Standardized Approach, basic indicator approach and operations risk. |

|advances |Funds received for goods or services prior to the delivery of the goods or services. Typically, the funds must be |

| |returned if the transaction is canceled or if the recipient of the advance fails to provide the goods or services. See |

| |progress payments. |

|adverse opinion |An opinion letter accompanying audited financial statements in which the CPA reports that the financial statements do |

| |not fairly present the financial position or the results of operations in conformity with GAAP. |

|affiliate |A business organization that shares some aspect of common ownership or control with another business organization. |

|affinity card |A card that is offered jointly by two organizations. One is a credit card issuer and the other is a professional |

| |association, special interest group or other non-bank company. For example, Citibank and American Airlines sponsor the |

| |Citibank AAdvantage card. |

|affirmative covenant |A provision in the lender's documents that requires the borrower to do something in the future. For example, a |

| |requirement for the borrower to provide annual audited financial statements to the bank during the term of the loan. |

|affordable growth rate |The maximum rate at which a firm's sales can grow without straining the capacity of the firm's capital or other |

| |financial resources. This term is closely associated with a formula of the same name. |

|AFMLS |Asset Forfeiture and Money Laundering Section, U.S. Department of Justice. |

|AFS |See available-for-sale. |

|after-acquired property clause |A provision in a bank's documents, the purpose of which is to extend the bank's interest in the debtor's property to |

| |property not owned by the debtor at the time of the transaction but subsequently acquired by the debtor. |

|agencies |Informal name used to refer to securities issued by agencies of the United States government and by U.S. government |

| |sponsored enterprises. |

|agency fund |A fund normally used to account for assets held by a government as an agent for individuals, private organizations or |

| |other governments, and/or other funds. The agency fund also is used to report the assets and liabilities of Internal |

| |Revenue Code, Section 457, deferred compensation plans. |

|aging |A report or schedule of all outstanding accounts payable or accounts receivable that lists all account debtors or |

| |creditors by name, shows the total amount due to each debtor, and shows how much of the amount due to each debtor is due|

| |within specific time periods. |

|AHP |An acronym for affordable housing program. |

|AICPA |See American Institute of Certified Public Accountants. |

|a.k.a. |Initials for "also known as". A designation used to denote an alternative name for a person, business or organization. |

|ALCO |See asset/liability management committee. |

|ALLL |An acronym for allowance for loan and lease losses. |

|allonge |A paper attached to negotiable instruments for signatures when there isn't enough room on the instruments themselves for|

| |the signatures. |

|allowance for depreciation |See accumulated depreciation. |

|allowance for doubtful accounts |A reserve for accounts receivable that may not be collectable. The allowance is always shown as a reduction from gross |

| |receivables used to calculate net receivables. An example of a contra-asset account. |

|allowances |Reductions to gross sales that occur when customers are given partial credit for sold goods that the buyer is not |

| |satisfied with. An accounting term usually used together with returns. |

|ALM |See asset/liability management. |

|alternative minimum tax (AMT) |A federal income tax applied to individuals and corporations that take advantage of tax benefits in amounts that are |

| |large relative to their incomes. Investors subject to AMT lose the benefits of the tax exemption for interest paid on |

| |otherwise tax-exempt securities. |

|AMA |See Advanced Measurement Approaches. |

|amendment |A revision to a document. A UCC financing statement can be amended by filing a designated amendment form, usually UCC-3.|

|American depository receipt (ADR) |Trust receipts equal to a specific number of shares of corporate stock issued in a foreign country. ADRs are sold and |

| |traded in the United States. |

|American Institute of Certified Public |The national association that represents certified public accountants in business and industry, public practice, |

|Accountants (AICPA) |government, and education. |

|American option or American-style option|An option that the holder can exercise any time prior to and including the expiration date. See European option, Bermuda|

| |option and Asian option. |

|amortization |(1) The process of making regular, periodic decreases in the book or carrying value of an asset. For example, when a |

| |bond is purchased at a price above 100, the difference between the purchase price and the par value, the premium, is |

| |amortized. Premiums are usually amortized in roughly equal amounts that completely eliminate the premium by the time |

| |that the bond has matured or by the call date, if applicable. |

| |(2) Liquidation of a loan or security by means of periodic reductions. The principal amount of loans is amortized by the|

| |periodic, usually monthly, payment of a fraction of the principal calculated to repay the entire amount of principal due|

| |by the date of the last scheduled periodic payment. Amortization methods differ based upon the type of loan. Mortgage |

| |loans and securities usually have level payments of principal and interest. For such amortizations, the interest |

| |consumes most of the early payments and, therefore, principal amortization increases as the loan ages. Many business |

| |loans use a level amortization with roughly equal principal reductions from each periodic payment. |

|amortization period |For financial instruments, the time from the inception of a loan or investment instrument with scheduled principal |

| |repayments to the due date of the final contractually obligated principal repayment. For fixed assets, the period from |

| |the acquisition of a fixed asset to the date of the last periodic reduction (made to reflect depreciation) of the book |

| |value of that asset. (Assets may be depreciated until the book value is zero, but sometimes are only depreciated until |

| |the book value is reduced to an assumed salvage value.) |

|amortizing swap |An interest rate swap with a declining notional principal. |

|AMT |See alternative minimum tax. |

|analytical solution |See closed form solution. |

|analytical VAR |See correlation VAR. |

|annual percentage rate (APR) |The total financing costs associated with a loan on an annualized basis, divided by the amount borrowed. As defined by |

| |Federal Reserve Regulation Z and the Truth-in-Lending Act, this is a precisely calculated measure of the cost of a loan.|

| |The Truth-in-Lending Act and Regulation Z have specific requirements covering both how to calculate and how to disclose |

| |APRs. |

|annual percentage yield (APY) |A precisely calculated measure of yield paid on a bank deposit account. |

|annuities |Contracts that guarantee income, often for an individual's lifetime, in exchange for a lump sum or periodic payment. |

| |Annuity contracts have a number of standard variants, including deferred, fixed, immediate, or variable. |

|anticipated income doctrine of liquidity|An explanation of bank liquidity developed by Herbert Prochnow, in which the net cash flow of bank borrowers, rather |

| |than subsequent new borrowings, is seen as the true source of loan repayments. Accordingly, to the extent that loans are|

| |written with payment terms and maturities that reflect the borrower's cash flow stream, the cash flow to the bank from |

| |loan principal payments is the source of bank liquidity. See commercial loan theory of liquidity and shiftability theory|

| |of liquidity. |

|anticipatory hedge |A hedge of a yet-to-be-acquired asset or liability. |

|appraisal |A statement or estimate of the market value of tangible personal property or real estate. Under the federal appraisal |

| |regulations for real estate pledged to secure loans, the term "appraisal" refers to a statement of market value that |

| |meets the five specific standards. See complete appraisal, evaluation, and limited appraisal. |

|appraisal surplus |The difference between the historical cost and the appraised value of fixed assets. |

|APR |See annual percentage rate. |

|APY |See annual percentage yield. |

|arbitrage |(1) In theory, arbitrage is the simultaneous purchase and sale of two identical commodities or instruments to take |

| |advantage of price variations in different markets. For example, the purchase of gold in London and the simultaneous |

| |sale of gold in New York. |

| |(2) In practice, the term is used to refer to the simultaneous purchase and sale of any two contracts or commodities |

| |with largely offsetting risks. For example, the purchase of two-year Treasuries and the sale of futures contracts for an|

| |equivalent amount. |

| |(3) In municipal finance, the specific practice of investing funds obtained at a tax-preferred low rate of interest in |

| |higher-yielding investments until the funds are needed for the purpose intended. |

|arbitrage CDO |A CDO whose purpose is to allow a money manager to expand assets under management and equity investors to achieve |

| |non-recourse leverage to CDO assets. There is no "arbitrage" in the classic sense of the word. Rather, equity holders |

| |hope to capture the difference between the after-default yield on the assets and the financing cost due debt tranches. |

| |See collateralized debt obligation (CDO). |

|arbitrage free |A type of financial model that generates market scenarios excluding scenarios that provide arbitrage opportunities. |

|arbitrageur |An individual or broker who engages in arbitrage. |

|ARM |See adjustable-rate mortgage. |

|ARP |See account reconciliation services |

|arrears |Unpaid dividends or bond interest that a corporation owes its stockholders or bond holders after the payable or due date|

| |on which the dividends or interest should have been paid. |

|Article 2A |Portion of the UCC covering leases. See Uniform Commercial Code. |

|Article 8 |Portion of the UCC covering collateral interests in both physical (certificated) and book-entry (uncertificated) |

| |securities. See Uniform Commercial Code. |

|Article 9 |Portion of the UCC covering security interest in most personal property other than securities. See Uniform Commercial |

| |Code. |

|article of agreement |Contractual arrangement used in some states under which a buyer purchases real estate from a seller over a period of |

| |time, usually by making periodic installment payments. Title is not conveyed to the buyer until the final payment is |

| |made. Also called land contract. |

|Asian option |An option whose payoff is based upon the average value of an underlying over a specified period of time. See underlying.|

| |Also see American option, European option and Bermuda option. |

|as-extracted collateral |Oil, gas, or other minerals that are subject to a security interest that is created by a debtor having an interest in |

| |the minerals either before or after extraction. A security interest can also include accounts arising out of the sale at|

| |the wellhead or minehead of oil, gas, or other minerals in which the debtor had an interest before extraction. A |

| |category of personal property collateral defined by the 2000 revisions to Article 9 of the UCC. |

|ascending rate bonds |Securities with a coupon rate that increases in previously defined increments at scheduled intervals. |

|asked or asking price |The trading price proposed by the prospective seller of securities. Also called the offer or offered price. |

|asset-backed security (ABS) |A debt security collateralized by assets. Created from the securitization of any loans other than mortgage loans. |

| |(Securitized mortgage loans are called mortgage backed securities or collateralized mortgage obligations.) Typically, |

| |asset backed securities area created from consumer installment or credit card loans. Securitized commercial |

| |(non-consumer) obligations are typically called collateralized debt obligations or CDOs. CDOs are sometimes defined to |

| |be a subset of ABSs. ABSs may be structured in a variety of ways including simple "pass through" structures and complex,|

| |"multi-tranche" structures. The value that ABSs provide to investors is comprised of the cash flows due to the ABS |

| |holders from the underlying loans. ABS issues are typically structured so that the bankruptcy or insolvency of an |

| |underlying borrower does not impact the cash flow received by the security owner. See special purpose vehicle and |

| |waterfall. |

|asset sensitive |Describes an entity's position when an increase in interest rates will help the entity and a decrease in interest rates |

| |will hurt the entity. An entity is asset sensitive when the impact of the change in its assets is larger than the impact|

| |of the change in its liabilities after a change in prevailing interest rates. This occurs when either the timing or the |

| |amount of the rate changes for liabilities causes interest expense to change by more than the change in interest income.|

| |The impact of a change in prevailing interest rates may be measured in terms of the change in the value of assets and |

| |liabilities. In that case, an asset-sensitive entity's economic value of equity increases when prevailing rates rise or |

| |declines when prevailing rates fall. Alternatively, the impact of a change in prevailing rates may be measured in terms |

| |of the change in the interest income and expense for assets and liabilities. In that case, an asset-sensitive entity's |

| |earnings or net income increases when prevailing rates rise and declines when prevailing rates fall. |

|asset/liability management committee |A committee, usually comprising senior managers, responsible for managing assets and liabilities to maximize income and |

|(ALCO) |safety over the long run. In a financial institution, the ALCO is usually responsible for asset and liability |

| |distribution, asset and liability pricing, balance sheet size, funding, spread management, and interest rate sensitivity|

| |management. Usually used somewhat redundantly, as in ALCO committee. |

|asset/liability management (ALM) |Coordinated management of all of the financial risks inherent in the business conducted by a financial institution. The |

| |process of balancing the management of separate types of financial risk to achieve desired objectives while operating |

| |within predetermined, prudent risk limits. Accomplishing that task requires coordinated management of assets, |

| |liabilities, capital, and off-balance sheet positions. Therefore, in the broadest sense of the term, ALM is simply the |

| |harmonious management of cash, loans, investments, fixed assets, deposits, short-term borrowings, long-term borrowings, |

| |capital, and off-balance sheet commitments. However, in practice, the term is often used to refer to segments of that |

| |broader definition such as only interest rate risk management or only interest rate and liquidity risk management. See |

| |earnings at risk, market value at risk and market value of portfolio equity. |

|assets repriced before liabilities |A measure of the gap between the quantity of assets repricing and the quantity of liabilities repricing within a given |

| |period of time. A simple measure of a financial institution's exposure to beneficial or adverse consequences from |

| |changes in prevailing interest rates. |

|assignee |The party to whom an assignment is made. |

|assignment |Transfer of any contractual agreement between two parties. One of the parties, the assignor, transfers its rights or |

| |obligations to another party, the assignee. If interests in assets of the assignor are assigned, the assignment |

| |transfers all or some of the rights of ownership to the assignee. If interests in obligations of the assignor are |

| |assigned, the assignor is totally or partially absolved from further performance. Lenders sometimes see leased property |

| |assigned from the original lessor to another party who then pledges them to the bank as collateral for a loan. For |

| |personal property collateral, a secured party may enter an assignment of its security interest into the public record by|

| |using a standard form called UCC-3. |

|assignment of buyer's interest in land |A document used when a borrower is purchasing real estate over time under an article of agreement or land contract. The |

|contract |document assigns the lender all of the borrower's personal property, real property, and contractual rights under the |

| |land contract. |

|assignment of lease and rentals |A document used in real estate loans when the mortgaged property is leased to third-party tenants. If the borrower |

| |defaults, the assignment of lease and rentals gives the lender the right to receive rents from the tenants and to |

| |transfer the leases to a subsequent purchaser of the property. |

|assignment of seller's interest in land |A document used in real estate loans when the mortgaged property is subject to a land contract or article of agreement |

|contract |under which it is being sold over time to a third party. If the borrower defaults, the assignment of the land contract |

| |gives the lender the right to receive payments from the buyer and to transfer the land contract to another buyer. |

|Association of Financial Professionals |A national organization for finance professionals that provides educational, and certifications programs, research |

| |programs, standards development, and government relations activities. |

|assumable |As applied to mortgage loans, assumable means that a borrower who sells his or her home may transfer the outstanding |

| |mortgage loan secured by that dwelling to the new buyers. The new buyers are said to assume the loan. |

|assumed name |Name used by a proprietorship, partnership, or corporation to conduct business that is different from the legal name of |

| |the proprietorship, partnership or corporation. Sometimes an assumed name is prefaced by the initials "t/a" for "trading|

| |as" or "d.b.a." for "doing business as ". |

|asymmetric behavior |Unbalanced behavior exhibited by financial instruments, the rates or values of which do not change in proportion to |

| |changes in market rates. For example, increases in the prime rate quickly reflect most or all of increases in prevailing|

| |interest rates, while decreases in the prime rate are slow to reflect decreases in prevailing interest rates. |

|ATM |See Automated Teller Machine. |

|at the money |The situation in which the current market price, the spot price, of an underlying instrument is equal to the strike or |

| |exercise price of an option to buy or sell that instrument. |

|attachment |A procedure established by Article 9 of the UCC. Creditors must comply with this procedure in order to obtain a security|

| |interest in property owned by a debtor. Alternatively or in addition, the process may be used to give the creditor a |

| |security interest in property owned by a guarantor or by another third party. Often, attachment alone is not sufficient |

| |to establish the priority of the creditor's interest relative to the interests of other creditors. See financing |

| |statements and perfection. |

|attorney's certificate of title |See title opinion. |

|attrition analysis |Evaluation of the reduction in the amount of an asset or liability held. For example, an analysis of the reduction in |

| |savings account balances caused by withdrawals over time. |

|audited statements |The most reliable type of financial statements. The audit is based on information submitted by the client, and the CPA |

| |does not verify all of the information. Limits on the scope of the audit and on the CPA's responsibility are described |

| |in the opinion letter that accompanies the audited statements. However, the value of an audited statement is that the |

| |independent CPA is responsible for testing and verifying any numbers that seem questionable or unusual as well as the |

| |most material financial information. For example, if a firm has a material amount of accounts receivable, the auditor |

| |will typically confirm at least a sample of those accounts. If a firm has a material amount of inventory, the auditor |

| |will typically perform a physical verification of that inventory. |

|authenticated security agreement |A electronic security agreement between the debtor and the bank that is accepted by the borrower either by downloading |

| |the agreement into a personal database or by printing a copy. As an alternative to a security agreement physically |

| |signed by the debtor, the 2000 amendments to the UCC provide for an authenticated security agreement. |

|authority |A government or public agency created to perform a single function or a restricted group of related activities. Usually,|

| |such units are financed from service charges, fees, and tolls, but in some instances they also have taxing powers. An |

| |authority may be completely independent of or partially dependent upon other governments for its financing or the |

| |exercise of certain powers. |

|automated clearinghouse (ACH) |The ACH network is a nationwide electronic funds transfer system for participating depository financial institutions. |

| |The American Clearing House Association, Electronic Payments Network, Federal Reserve and Visa act as ACH Operators, |

| |central clearing facilities through which financial institutions transmit or receive ACH debits and credits. The ACH |

| |network serves 20,000 financial institutions, 3 million businesses, and 100 million individuals. The ACH Network is |

| |commonly used for direct deposit of payroll and government benefits such as Social Security, direct payment of consumer |

| |bills, business-to-business payments, federal tax payments, and, increasingly, e-commerce payments. In 2000 there were |

| |6.9 billion ACH payments made worth more than $20 trillion. |

|Automated Teller Machine (ATM) |A computer terminal for user initiated banking transactions. |

|automatic stay |An injunction that automatically becomes effective upon the filing of any bankruptcy proceeding. The stay precludes |

| |creditors from taking action against the debtor or the debtor's property. In Chapter 12 or 13 bankruptcy proceedings, |

| |the automatic stay also applies to co-obligors and guarantors. |

|availability |The condition in which deposited funds are available for use by the depositor. The time lag between the date of a |

| |deposit and the date it is credited to the collected balance. |

|availability schedule |A schedule that determines when each bank in the check-clearing process will receive credit and when the depositor of |

| |checks will be able to withdraw or invest the funds. The schedule sets a standard time period since each check cannot be|

| |individually traced through the check-clearing process. Every major bank publishes its availability schedule based on |

| |its location and on the location of the bank on which the check is drawn. |

|available balance |The balance in an account that can be invested or withdrawn. Available balance refers to the bank ledger balances less |

| |checks in the process of collection. Also called collected balances, good funds, or usable funds. |

|available-for-sale (AFS) |One of three defined categories established in FAS 115 for the classification of financial instruments held as assets on|

| |the books of an investor. Available-for-sale, or AFS, securities are securities that the investor is unable or unwilling|

| |to commit to hold to maturity. Designation of a security as AFS does not mean that the investor plans to sell it prior |

| |to maturity. FAS 115 requires investors to report unrealized gains or losses in AFS securities as changes in reported |

| |equity. See FAS 115, held-to-maturity, and trading. |

|aval |A guaranty. |

|average life |The time-weighed for a stream of principal cash flows. See weighted average life. |

|average daily balance |The average daily balance is a method used to calculate finance charges. It is calculated by adding the outstanding |

| |balance on each day in the billing period, and dividing that total by the number of days in the billing period. The |

| |calculation includes new purchases and payments. |

B

|BA |See banker's acceptance. |

|back-end load |A form of sales charge imposed on investors by some mutual funds. These charges may be called back-end loads, deferred |

| |loads, deferred sales charges, contingent deferred sales charge (CDSC), or redemption fees. Regardless of the name, |

| |funds with deferred sales charges are simply one form of load funds. These funds offer investors the opportunity of |

| |paying a sales charge later rather than paying one at the time of purchase. The main advantage is that earnings from the|

| |investment in a deferred charge fund are paid on the full amount of the investor’s principal. In contrast, earnings in a|

| |fund with an front-end load are only paid on the net amount of the investor’s principal after the front-end charge is |

| |deducted. A second, potentially significant, advantage, is that deferred sales charges often decrease as the investor’s |

| |holding period lengthens. See front-end load, load, and no-load. |

|backlog |Unfilled orders for goods or services. Orders for goods or services that the company has not yet delivered or rendered |

| |to its customers. |

|backtesting |In general, the process of comparing predictions from a forecasting model to observable data. A model may be run using |

|back-testing |historical inputs after which the mode's forecast is compared to the actual outcomes observed for the forecasted period.|

| |In practice, either final model outputs or intermediate calculations may be backtested. Backtesting is often inexact |

| |because of the impact of extraneous events on the observable data. |

|bad delivery |A delivery of securities that does not fulfill the requirements for good delivery. See good delivery. |

|bailment for hire |A safekeeping agreement between a safekeeping institution and its customer. A contract whereby a third-party bank or |

| |other financial institution, for a fee, agrees to exercise ordinary care in protecting the securities held in |

| |safekeeping for its customers. |

|balance sheet matching |The (discredited) process of "assigning" groups or quantities of liabilities to groups or quantities of assets. |

| |Sometimes described as the identification of "mini-banks" within the bank. |

|balloon loan |A loan for which the final payment, larger than all of the previous, regularly scheduled payments, is due in a lump sum |

| |before the loan is fully amortized. The final payment is called a balloon payment. |

|balloon mortgage |A mortgage loan with a balloon payment. Typically, the balloon payment is due 10 or 15 years after the loan is made. |

|balloon payment |A contractually required loan payment, almost always the final payment, that is larger than the other contractually |

| |required, periodic loan payments. Results from the fact that required, periodic loan payments are too small to fully |

| |amortize the loan balance by the maturity date. |

|BAN |See bond anticipation note. |

|band |The PSA range within which certain performance measures such as yield and average life are set for a CMO tranche. This |

| |range is expressed in terms of PSA speeds. Differences between predicted speeds and the actual speeds subsequently |

| |experienced can cause bracket creep. |

|band of investment |A method of determining a cap rate that blends the return or cash flow required by an equity investor with the return or|

| |interest rate required by the debt lender. Also called cash flow method. |

|bank float |The time between the date a check is deposited in a bank and the date it is charged to the drawer. Also called bank |

| |collection float, check-clearing or transit float. Not the same as float. |

|bank name risk or bank name liquidity |See bank-specific liquidity risk. |

|risk | |

|Bank Secrecy Act of 1970 (BSA) |More formally known as The Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970. |

| |Designed to aid the federal government in detecting illegal activity through tracking certain monetary transactions. |

| |Requires financial institutions, broker-dealers, casinos and money services businesses to file reports of suspicious |

| |transactions. Also establishes certain exemptions to the currency transaction reporting requirements. The corresponding |

| |BSA regulation is found at 31 C.F.R. Part 103. See also USA PATRIOT Act which substantially amended this statute in |

| |2001. |

|bank services contract |A contract with a bank outlining the responsibilities of the bank and the bank’s customer. |

|bank-specific liquidity risk |One of three main types of liquidity need environments. The risk that a bank might experience a funding crisis resulting|

| |when one or more events or problems applicable just to the bank cause funds providers to lose confidence in the bank. |

| |Also know as internal liquidity risk or bank name risk. See liquidity in the ordinary course of business and systemic |

| |liquidity risk. |

|banker's acceptance (BA) |A short-term financial instrument that is the unconditional obligation of the accepting bank. Banker’s acceptances, or |

| |BAs, arise from transactions involving the import, export, transit, or storage of goods, including domestic as well as |

| |international transit. For investors, it is very important to realize that the underlying transaction that gives rise to|

| |a BA is almost completely irrelevant to the credit quality or the liquidity of the instrument. The actual BA is created |

| |at a late stage in the underlying transaction when a bank accepts its obligation to pay the holder of the accepted |

| |draft. In other words, when the transaction becomes a BA it becomes an unconditional obligation of the accepting bank. |

| |From an investor's point of view, a BA is a bank obligation that has at least the same credit strength as any CD issued |

| |by the same bank. Typically, BAs are stronger than CDs because, in addition to the credit strength of the accepting |

| |bank, BAs are backed by the credit strength of a drawer; an endorsing bank, if one is involved in the transaction; and |

| |usually by the pledge of documents representing ownership of the trade goods and insurance on the goods. BAs do not, |

| |however, carry federal deposit insurance. BAs are considered safe, liquid, short-term money market investments. For bank|

| |holders of BAs, an additional issue is called eligibility. See eligible banker's acceptances. |

|barbell |A maturity pattern within a portfolio in which maturities of the portfolio assets are concentrated in both the short and|

| |long ends of the maturity spectrum with substantially smaller holdings of assets with intermediate-term maturities. |

|Basel II |The common name for capital guidelines issued by the Bank for International Settlements (BIS) located in Basel, |

| |Switzerland. The Basel II capital guidelines replace previous, much simpler, BIS guidelines. The guidelines are |

| |developed by an international committee of banking regulators and implemented by rules issued by the national |

| |regulators. |

| |Risks, under Basel II, are regulated in three general ways called "pillars". Pillar I calls for explicit capital |

| |allocations. Credit risk and operations risk fall under pillar I. Pillar II calls for supervisory review of capital |

| |adequacy. Interest rate risk and liquidity risk fall under pillar II. Pillar III calls for public disclosure. All risks |

| |fall under pillar III. |

|basic indicator approach |One of three methods for quantifying capital required for operational risk under proposed Basel II capital rules. Banks |

| |using the basic indicator approach must hold capital for operational risk equal to the average over the previous three |

| |years of a fixed percentage of positive annual gross income. Based on the questionable assumptions that losses from |

| |operational risk are closely proportionate to gross income. See also Standardized Approach, Advanced Measurement |

| |Approaches and operations risk. |

|basis |(1) The difference between rates or prices of assets that are related but not identical. For example, the difference |

| |between the cash price and the futures price of a security. Sometimes called spread. |

| |(2) The difference between the price of a futures contract and the price of the underlying. |

| |(3) The number of days in a bond coupon period. See day basis. |

|basis point |A unit of measurement for interest rates or yields that is expressed as a percentage. One-hundredth of one percent. One |

| |hundred basis points equal one percent. |

|basis risk |The risk to a holder of financial instruments that a change in prevailing interest rates will not affect the prices of |

| |or yields on similar instruments in exactly equal amounts. For example, an increase in prevailing interest rates might |

| |raise 3-month U.S. Treasury yields by 100 basis points while 3-month certificate of deposit yields go up by only 85 |

| |basis points. One of the four primary components of interest rate risk. Sometimes called spread risk. |

|basis swap |A type of interest rate swap in which the net cash flows that the parties agree to exchange are based upon the |

| |differences between two different interest rate indexes. Banks use basis swaps to hedge basis risk by locking in a net |

| |interest rate spread between a variable rate cost of funds tied to one index and a variable rate asset tied to a |

| |different index. See interest rate swap and swap. |

|bearer |The holder of an instrument. |

|bearer bonds or stocks |Securities owned by and payable to whomever holds the physical certificate. Securities without a registered owner. |

|benchmark |(1) A standard of comparison used for judging performance. For example, the return from a bond portfolio may be compared|

| |to the return from a benchmark instrument or portfolio. In this context, a nearly risk-free benchmark or one that |

| |closely matches the risk in the bond portfolio may be selected. |

| |(2) The process of comparing a forecast or simulation to a standard for the purpose of evaluating the accuracy of the |

| |forecast or simulation. For example, the forecasted change in net income projected by an ALM simulation model may be |

| |benchmarked by comparing that forecast to subsequent earnings. Also called benchmarking. |

| |(3) See index. |

|beneficial owner |The party that receives all of the benefits or rights of an owner of a security even though the legal ownership of the |

| |security is recorded in the name of a broker or a bank in street name. |

|Bermuda option |An option that allows the issuer of a security to call the security at discrete points in time after a certain date. |

| |Also known as a modified American option. See American option, European option and Asian option. |

|beta |A Greek letter used by mathematicians to label the degree of sensitivity to changes in one variable to changes in |

| |another. The name for correlation of the changes. |

|beta-adjusted gap |Gap reports modified to mollify the errors caused by basis risk. The essential concept of beta-adjusted gap is that all |

| |interest rates do not change by the same amounts, but that there is an identifiable relationship, a correlation, between|

| |changes in various interest rates. Some rates are more sensitive to change than other rates. In beta-adjusted gap |

| |analysis, the volumes of assets and liabilities subject to repricing are weighted to reflect the historical sensitivity |

| |of the yields or costs of those assets and liabilities relative to some benchmark yield or cost. |

|BEY |See bond equivalent yield. |

|bid or bid price |The trading price acceptable to a prospective buyer of securities. |

|big board |Informal name for the New York Stock Exchange. |

|bilateral netting |A legally enforceable arrangement between two parties to two or more swaps that creates a single legal obligation |

| |covering all of the individual swap contracts. This means that the size of the risk that one party is exposed to for the|

| |default or insolvency of the counterparty is net of all of the positive and negative values of the contracts included in|

| |the bilateral netting arrangements. Parties that engage in numerous swap contracts may use bilateral netting agreements |

| |to be able to recognize only the net sum of their obligations rather than the gross total of the individual swap |

| |contracts. Bilateral netting is also used by a party that wishes to cancel a swap contract, in which case the party can |

| |enter into a new swap that is an equal but offsetting swap with the same counterparty. The two parties can then enter |

| |into a bilateral netting agreement under which the two equal but offsetting swap contracts net to zero. |

|billing cycle |The number of days between statement dates. |

|billing float |Float resulting from delays in billing or in the payor’s response to those bills. For governments, can also occur if |

| |payor taxpayers drag their feet in filing self-assessed taxes. When due dates are fixed, an easy measure of billing |

| |float compares the date paid to the date due. |

|billings in excess of cost |A liability created under a type of accrual accounting used when firms such as contractors bill their customers in |

| |accounting periods for costs that they incur in subsequent accounting periods. |

|bills |See Treasury bills. |

|binder |A preliminary, temporary insurance agreement that obligates the insurance company to pay the insured if the loss insured|

| |against occurs after the binder is issued but before the insurance policy is issued. |

|Black Scholes model |A model used to value options. This model was developed in 1973 by Fischer Black and Myron Scholes. While not the only |

| |sophisticated, mathematically derived model for valuing options, it was the first, and it remains the best known. |

|blanket lien |An informal term meaning a lien on all of the debtor's current and subsequently acquired personal property assets. |

|blue list |Informal name for a daily Standard & Poor's publication titled the Blue List of Current Municipal Offerings. |

|BMA |See Bond Market Association. |

|BOLI |Acronym for "bank-owned life insurance". |

|bond |(1) A debt security. Sometimes used only in reference to long-term debt securities. Sometimes called a fixed-income |

| |security even though many bonds have floating interest rates. |

| |(2) A guarantee provided by a surety or insurance company. For example, fidelity bond, indemnity bond, performance bond,|

| |or payment bond. |

|bond anticipation note (BAN) |A short-term note sold by a public entity that will be repaid from the proceeds of an anticipated bond issue. |

|bond equivalent yield |An annual yield, expressed as a percentage, describing the return provided to bond holders. A bond equivalent yield is |

| |double the simple interest, semiannual yield. Since Treasury and agency notes and bonds, as well as most corporate and |

| |municipal bonds, pay interest semiannually, the bond equivalent yield is a way to compare yields available from discount|

| |securities such as Treasury bills and BAs with yields available from coupon securities. From that usage, this yield |

| |measure is also known as the coupon yield equivalent or the equivalent bond yield. For securities that pay daily, |

| |monthly, or quarterly interest, the bond equivalent yield understates the benefits obtained from the compounding of |

| |income. |

|bond indenture |A document that sets forth the terms of a bond issue, the obligations of a bond issuer, and the rights of the bond |

| |holders. The bond indenture is a contract between the company that issued the bonds and the bond trustee acting on |

| |behalf of the bond holders. Bond indentures may include a variety of provisions and thus define and create the |

| |differences in term and risk. |

|bond insurance |Credit support for a bond or a tranche in a multi-tranche debt security. The credit support is provided by an external, |

| |third party - usually an insurance company that specializes in financial guarantees. |

|Bond Market Association (BMA) |An industry trade organization for U.S. broker/dealers. Among other things, the BMA has developed standard documentation|

| |for repurchase agreement transactions and for describing prepayments received from MBSs. Formerly known as the Public |

| |Securities Association (PSA). |

|bond swap |The simultaneous, or nearly simultaneous, purchase of one debt security with the proceeds from the sale of another debt |

| |security. The swap is done after the investor has conducted an analysis showing that the debt security being purchased |

| |has more desirable characteristics than the debt security being sold. |

|bond value (for convertible securities) |See investment value (for convertible bonds). |

|bonding |(1) Either the process of obtaining or the state of having a fidelity, indemnity, performance, payment, or similar bond.|

| |In commercial construction financing, bonding usually refers to a contractor’s performance bond. For employees of |

| |financial institutions, bonding usually refers to fidelity bonds. See fidelity bond, payment bond and performance bond. |

| |(2) Refinancing short-term debt with long-term debt is sometimes called bonding out. |

|book entry |The nonphysical record of ownership, custody, and transfer of securities through electronic means. The system for |

| |settlement, delivery, and custody of uncertificated securities. |

|book entry securities |Stocks, bonds, other securities, and some certificates of deposit that are purchased, sold, and held with only manual or|

| |computer accounting entries rather than transfers of physical certificates to evidence the transfer. Typically, instead |

| |of a physical certificate or instrument, buyers only receive receipts or confirmations as evidence of their ownership. |

|book value |The value at which an asset is carried and reported on the owner’s balance sheet. For debt securities, the current book |

| |value may be the purchase price plus accretion (in the case of securities purchased at a discount) or the purchase price|

| |minus amortization (in the case of securities purchased at a premium). Book value may differ, perhaps significantly, |

| |from market value. |

|bootstrapping |For financial risk mangers, bootstrapping means (1) the procedure where coupon bonds are used to generate the set of |

| |zero-coupon bond prices, or (2) the use of historical returns to create an empirical probability distribution for |

| |returns. Bootstrapping is an iterative calculation technique, often used in the construction of specialized time series.|

| |For example, the calculation of forward rates from traditional yield curves uses an iterative process to extract the |

| |implied rate for each forward period. The term is used in other ways in other contexts. |

|bow |An informal term used to describe the curvature in a yield curve. |

|break-even point |(1) The price level at which income equals expense. |

| |(2) The expense level at which expense equals income. |

| |(3) The market price of a financial instrument that just equals the purchase price plus cost of carry for an investor |

| |owning that instrument. |

| |(4) The price level of a call option that equals the sum of the exercise price plus the premium paid to acquire the |

| |option, or the price level of a put option that equals the exercise price minus the premium. |

|break-even interest rate |The maximum interest rate that a firm or property can pay from available cash flow and still have enough cash flow to |

| |make all required principal and interest payments. |

|break-even occupancy |The minimum occupancy level of a commercial real estate property that will generate enough cash flow to make all |

| |required principal and interest payments. |

|break-even prepayment rate |The specific prepayment rate (speed) at which the yield of a mortgage security is equal to the yield available from |

| |another security to which it is being compared. |

|break-even sales |The minimum sales level that a firm must achieve in order to generate enough cash flow to make all required principal |

| |and interest payments. |

|break-even time (for convertible |The amount of time before the higher yield on the convertible bond compared to an otherwise similar nonconvertible bond |

|securities) |compensates the investor for the excess cost of the convertible over the common stock. Usually calculated by using |

| |current yields rather than the coupon and dividend rates. |

|bridge loan |A short-term loan to enable the borrower to purchase an asset where the loan is to be repaid from the proceeds of the |

|bridge financing |sale of an asset being replaced by the asset just purchased. In consume loans bridge loans may be used to enable the |

| |cons8umer to buy a new house before selling her current house. Also commonly used investment banking for project |

| |finance, buyouts and other large transactions. |

|broker |A party who brings buyers and sellers together. Brokers do not take ownership of the property being traded, but rather |

| |they are compensated by commissions. Brokers are not the same as dealers; however, the same individuals and firms who |

| |act as brokers in some transactions may act as dealers in other transactions. |

|brokered deposits |Bank deposits solicited by a third-party broker. Usually but not always deposits for some amount slightly below $100,000|

| |so that all interest as well as principal is covered by deposit insurance. Brokers are typically paid a fee by the |

| |depository bank. |

|BSA |See Bank Secrecy Act. |

|buckets |In gap reports, the predefined time interval groups are often called buckets. The buckets can be defined to represent |

| |whatever time units a bank wants to see in its gap reports. The time intervals can be single months or years. Smaller |

| |buckets, such as one-month buckets, give more detail, which in turn can provide a more accurate measure of interest rate|

| |risk. On the other hand, smaller buckets can require a greater number of buckets to show the interest rate risk far |

| |enough into the future for prudent analysis. Often, one-month buckets are used for the first six or twelve months with |

| |larger time intervals used as buckets for later periods. |

|builder’s risk insurance |Insurance covering perils resulting in loss caused by the builder's operations on the borrower's property. Usually |

| |required by property owners and by construction lenders when a contractor is hired to make improvements in an existing |

| |building or to construct a new building. |

|building code |Laws, usually but not always enacted by local government units, that set safety and fire protection standards. These |

| |codes affect the materials and methods used in the construction of buildings. For example, a code provision might |

| |require sprinkler systems in motel rooms. |

|bulge |Informal term used by some lenders to describe a provision in a line of credit promissory note that allows for a |

| |temporary increase in the maximum amount that can be borrowed under the line of credit. A bulge is particularly suited |

| |to loans to firms with seasonal increases in sales. |

|bullet loan |A name occasionally used to describe a promissory note used for transactions that do not require any principal to be |

| |repaid until the maturity of the note. Interest is usually due periodically prior to maturity. Most often used to |

| |describe loans with time periods of at least one year. |

|bullet security |An instrument that repays the full principal at maturity. |

|busted convertible |A convertible bond trading so far below its conversion value that it trades on investment value alone, meaning it has |

| |value only as a bond. It has essentially no equity value. |

|busted PAC |Planned amortization class tranches in collateralized mortgage obligations for which the companion or support tranche |

| |has been completely retired by larger than expected prepayments from the underlying mortgage loans. Because the |

| |companion or support tranche is no longer outstanding and can therefore no longer absorb future prepayments, the |

| |maturity of the PAC tranche(s) may be shorter than expected. See stressed PAC. |

|butterfly call spread |One of the more well known option trading strategies. A complex option trading strategy using puts and calls with |

| |different maturity dates and different strike prices. An option strategy designed to profit from stable or decreasing |

| |volatility. |

|buydown |A lump sum payment made to a creditor by a borrower or a third party to reduce the amount of some or all of the |

| |borrower's periodic payments to repay the indebtedness. |

|buy/sellback |A form of secured, short-term investment in which a security is purchased with a simultaneous agreement to sell it back |

| |to the seller at a future date. The purchase and sales agreements are simultaneous but the settlement dates for the |

| |transactions are not. The purchase is a cash transaction while the return sale is a forward transaction since it occurs |

| |at a future date. A buy/sellback is very similar to a reverse repurchase agreement, except that in a buy/sellback the |

| |investor is compensated by the difference between the purchase price and sales price rather than by interest. Unlike a |

| |reverse repurchase agreement, a buy/sellback probably does not include a haircut or collateral margin. Furthermore, the |

| |buy/sellback may be treated differently in the event of the buyer’s bankruptcy. Every transaction that is a buy/sellback|

| |from the buyer/lender’s point of view is, by definition, a sell/buyback from the seller/borrower's point of view. |

|buyer in the ordinary course of business|A purchaser who buys inventory from a seller who is in the business of selling that type of inventory |

C

|CAB |See capital appreciation bond. |

|calendar spread |An option trading strategy that involves buying two calls or two puts on the same underlying, but with different |

| |maturity dates. If two call options are used, the spread may be referred to as a calendar call spread. Similarly, if two|

| |put options are used, the spread may be described as a calendar put spread. When the exercise price of the two options |

| |is the same, the calendar spread is described as a horizontal spread. When the exercise price of the two options is |

| |different, the calendar spread is described as a diagonal spread. |

|call |An option that grants the holder the right to purchase an instrument in the future at a price established today. The |

| |call option gives the holder the right but not the obligation to purchase the underlying instrument. |

|call date |The date on which a call option may be exercised. The date before the contractual maturity date on which a bond may be |

| |redeemed at the option of its issuer. |

|call feature |See call option. |

|call option |A contract, or a provision in a contract, that gives its holder the right to buy an underlying security, commodity, or |

| |currency before a certain date. The option to purchase is for a predetermined price called the strike price. When the |

| |call option is a provision in a contract defining a transaction such as a bond or a loan, it is sometimes called a call |

| |feature. Options are often used in hedging. |

|call or calling |Making demand for payment in full of a loan, usually a loan that is in default, Often referred to as calling the loan. |

|call price |The price at which a call option may be exercised. For example, the price that an issuer is required to pay in order to |

| |redeem a bond before its maturity. |

|call protection |A feature of a bond issue that protects investors from risk of prepayment. In mortgage-backed bonds, call protection may|

| |take the form of prepayment penalties or lock-in periods. A lock-in period is a time period, starting from the issue |

| |date and ending at a specified subsequent date, during which an otherwise callable bond may not be called. This time |

| |period is specified in the bond’s indenture agreement. The call protection period may be a few months or as long as 25 |

| |years. For convertible bonds, see hard call protection and soft call protection (for convertible bonds). |

|call risk |The risk that declining interest rates will create an economic incentive for the owner of a call option to exercise that|

| |option. In MBSs, call risk is the risk that declining interest rates will accelerate prepayment of the underlying |

| |mortgage loans and thereby shorten the life of the investment. |

|callable bond |A bond that the issuer has the right to redeem prior to maturity. Some callable bonds may be redeemed on a single call |

| |date while others have multiple call dates. Some callable bonds may be redeemed at par while others can only be redeemed|

| |at a premium. |

|callable swap |A receive fixed/pay floating interest-rated swap with an embedded option that permits the holder to cancel the swap |

| |prior to its maturity. |

|CAMEL |An acronym for the institution composite rating system used by the federal regulators during a regulatory examination. |

| |The evaluation is based on Capital, Asset Quality, Management, Earnings and Liquidity. |

|cap |An upper limit for a variable, such as the upper limit on the interest rate paid or received in a transaction. For |

| |example, an adjustable-rate mortgage may have a cap of 10 percent. In this case, the rate can adjust however the loan |

| |terms provide, without exceeding 10 percent. Also called a ceiling. Cap is often used with its converse, a floor. A cap |

| |may be an embedded option, such as the cap on the rate for a floating rate loan, or a stand-alone option contract. |

|cap rate |An interest rate used in the process of capitalization. |

|Capacity |A lending and credit analysis term that describes a borrower’s or applicant’s ability to meet debt service obligations. |

| |See debt service coverage. |

|capital |(1) Usually refers to the total of the equity accounts in a firm. For a bank, the equity accounts are common and |

| |preferred stock, surplus, and undivided profits. For other corporations, equity accounts are common and preferred stock,|

| |surplus, and retained earnings. For bank capital, see tier 1 capital and tier 2 capital. |

| |(2) Sometimes used as a synonym for common stock, as in capital stock. |

|capital appreciation bond (CAB) |Securities that are issued at par, but which do not remit interest to the holder until maturity. The interest accrues at|

| |the coupon rate and is compounded at a stated rate. The issuer holds the accumulated, compounded interest until the |

| |maturity date of the bonds. At the maturity date, the bondholder receives all of the accumulated interest along with the|

| |par amount of the security. Reflecting their structure, CABs are sometimes called compound interest bonds or |

| |accumulators. |

|capital expenditures |Expenditures resulting in the acquisition of or addition to fixed assets. Expenditures made for the purpose of acquiring|

| |capital assets. |

|capital lease, capitalized lease |See lease. |

|capital markets disruptions |A type of systemic liquidity risk. The risk of funding problems arising from problems in the secondary markets for |

| |financial instruments. For a community bank, the main problem is that a capital market disruption arises from the fact |

| |that the bank is only able to sell investment assets at very unacceptable prices. See flight to quality and systemic |

| |liquidity risk. |

|capital markets hedges |Hedging done with instruments traded in the capital markets, including but not limited to swaps, options, and futures. |

| |(These hedge instruments are derivatives.) The term "capital markets" is slightly broader than "exchange traded" since |

| |some instruments, such as interest rate swaps, are bought and sold outside of the exchanges in over the counter (OTC) |

| |markets that are still capital markets. |

|capitalization |(1) The process of imputing a value to an income stream by dividing the annual net income before income taxes and |

| |depreciation by a rate of return expressed as a decimal. This process is used in real estate lending and appraisals. |

| |(2) The total of, or the mix between, a corporation’s shareholders’ equity and its long-term debt. |

| |(3) The process of reflecting a long-term, noncancelable lease on the lessee’s balance sheet. |

|capitalization ratio |A measure of a corporation’s reliance on long-term debt. Similar to the debt-to-worth ratio but not the same. This ratio|

| |is calculated by dividing long-term debt by the sum of long-term debt plus equity. |

|capitalized interest |Interest that a lender "receives" by adding the unpaid interest to the amount of the loan balance to be paid by the |

| |borrower. |

|capitalized lease |Lease obligations that must be capitalized under GAAP; the unpaid future lease payments due under the terms of the lease|

| |must be shown as a liability on the firm's balance sheet. As a general rule, this requirement applies to most equipment |

| |and buildings leased by a business and used in the conduct of the business. |

|caption |An option that grants the holder the right to purchase a cap. |

|CAR |See certificates of automobile receivables. |

|cascading late charges |The practice of imposing late charges for previously unpaid late charges. Federal Regulation AA prohibits this practice |

| |for consumer loans. |

|cash and due from banks |A banking expression used to describe the total sum of assets represented by cash, funds on deposit with the Federal |

| |Reserve bank, funds on deposit with correspondent banks, and items in transit to those banks |

|cash equivalents |Defined by FASB as short-term, highly liquid investments that are both: (a) readily convertible to known amounts of |

| |cash, and (b) so near their maturity that they represent insignificant risk of changes in value because of changes in |

| |interest rates. |

|cash flow |A finance and accounting term used to describe the net amount of cash generated by a firm’s operations. In traditional |

| |and over-simplified usage, cash flow is defined as the sum of net income after tax plus all noncash expenses such as |

| |depreciation. More modern and sophisticated usage defines cash flow to include the net difference between all cash |

| |outflows and cash inflows. |

|cash flow gap |The difference between cash inflows and cash outflows in a defined time period. Also called liquidity gap. |

|cash flow hedge |A type of hedge defined by FAS 133. An entity may designate a derivative instrument as hedging the exposure to |

| |variability in expected future cash flows that is attributable to a particular risk. That exposure may be associated |

| |with a recognized asset or liability such as all or some of the future interest payments due for a variable-rate debt. |

| |Alternatively, that exposure may be associated with a forecasted transaction such as a planned purchase or sale. Certain|

| |requirements must be met to qualify for cash flow hedge accounting. Gains or losses from the effective portion of a |

| |derivative used for a qualifying cash flow hedge are reported in comprehensive income. In other words, the gains and |

| |losses are used to adjust equity but are not included in income or losses from operations. Gains or losses from the |

| |ineffective portion of hedges must be reflected in earnings. See comprehensive income, FAS 133, and hedge effectiveness.|

|cash flow recapture clause |A loan agreement or bond indenture provision that requires the borrower to apply excess cash flow (or some percentage of|

| |excess cash flow) to reduce the outstanding debt balance. |

|cash flow yield |The monthly internal rate of return of an investment based upon a projected stream of monthly principal and interest |

| |payments. The cash flow yield depends upon the prepayment assumption that is used to describe anticipated cash flows. |

|cash forward agreement |A commitment to purchase or sell a security at a future date that is binding on both the buyer and the seller. Also |

| |known as a firm commitment. |

|cash instrument |Financial instruments or commodities for which the value is dependent upon the term, coupon rate, or other |

| |characteristics of the instrument itself. Differs from derivative instruments, for which the value is partially |

| |dependent upon characteristics or prices of an underlying cash instrument. Cash instruments include U.S. Treasury, |

| |agency, and government sponsored enterprise securities; municipal securities and corporate securities; syndicated loans;|

| |securitized mortgages, car loans and credit card receivables, (but not collateralized mortgage obligations); and bank |

| |obligations such as negotiable certificates of deposit and banker’s acceptances. Not the same as cash market or cash |

| |market instruments. |

|cash letter |Items (primarily checks) along with a letter that specifies amounts and directions. Cash letters are sent to a bank for |

| |transmittal to other banks for the purpose of clearing checks drawn on other banks. |

|cash management |One or a combination of various techniques for accelerating cash receipts, delaying cash disbursements, effectively |

| |utilizing banking services, managing or augmenting liquidity, increasing the amount of cash available for investment, |

| |and/or increasing returns from liquid investments. |

|cash management bills |U.S. Treasury bills. Unlike more typical bills with 13-, 26- or 52-week maturities, cash management bills are issued |

| |with maturities selected to match expected tax receipts. |

|cash market |(1) noun - A market for buying or selling financial instruments, commodities, or other property for cash settlement and |

| |immediate (as opposed to future) delivery. Also called spot market. |

| |(2) adjective — A financial instrument or transaction for which the ownership of the financial instrument or commodity |

| |is transferred at, or very shortly after, the time of the transaction, as opposed to futures market transactions where |

| |ownership of the financial instrument or commodity is transferred, if it is transferred at all, at a later date. Also |

| |called spot or spot market transactions. |

|cash settlement |The agreement of a buyer and seller to exchange the security and the payment on the same day as the trade. For money |

| |market instruments, cash settlement is the delivery of purchased securities against payment in fed funds on the same day|

| |that the trade is made. See settlement. |

|cash surrender value (CSV) |The amount of cash that can be obtained by the policy owner upon cancellation of a whole life insurance policy. CSV may |

| |also be borrowed by the policy owner. Only certain kinds of life insurance policies have cash surrender values. |

|CATS |See Certificate of Accrual on Treasury Securities. |

|CBO |See collateralized bond obligation. |

|CBOT |See Chicago Board of Trade. |

| | |

|CDO |See collateralized debt obligation. |

|ceiling |An upper limit for a variable. For example, an adjustable- rate mortgage may have a ceiling of 10 percent. In this case,|

| |the rate can be adjusted however the loan terms provide without exceeding 10 percent. Also called a cap. |

|CERCLA |See Comprehensive Environmental Response, Compensation, and Liability Act of 1980. |

|certificate of acceptance |See delivery and acceptance certificate. |

|Certificate of Accrual on Treasury |A proprietary name for a zero coupon Treasury security created from a coupon-bearing Treasury security. |

|Securities (CATS) | |

|certificate of automobile receivables |A form of asset-backed security. Securitized installment loans secured by automobiles. |

|(CAR) | |

|certificate of deposit (CD) |A deposit of funds, in a bank or savings and loan association, for a specified term that earns interest at a specified |

| |rate or rate formula. CDs may be secured or unsecured. CDs may be for terms as short as one week or for terms of 10 |

| |years or longer. CDs may have fixed or floating rates. CDs may be issued in either non-negotiable or negotiable form and|

| |in either physical or book-entry form. CDs may be issued by domestic offices of U.S. banks, by foreign branches of U.S. |

| |banks, and by foreign banks at either domestic U.S. or foreign locations. See Eurodollar CDs, jumbo CDs, negotiable CDs |

| |and Yankee CDs. |

|certificate of good standing |A written form prepared by a state office or officer attesting to the fact that a named corporation is in good standing |

| |in that state. |

|certificate of insurance |A document that describes an insurance policy. It is issued for informational purposes only. It is not legal evidence of|

| |insurance and may even describe a policy that has not yet been issued. See binder. |

|certificate of origin |A document that specifies the country of origin for goods traded internationally. |

|certificate of participation (COP) |Undivided proportionate interests in the future lease payments made by the municipal lessees/issuers. Investors owning |

| |COPs own the right to receive a portion of the payments arising from the lease, but do not own debt of the lessee. |

|certificate of survey |See survey. |

|certificate of title |See title opinion. |

|certificated |Legal term used (especially in UCC Article 8) as an adjective to describe stocks, bonds, other investments, and |

| |certificates of deposit held in physical form. |

|CFTC |See Commodity Futures Trading Commission. |

|chain of title |Another name for abstract of title. |

|change in factor amortization |See level factor amortization. |

|character |A term used by lenders and credit analysts to describe an individual’s integrity and management ability. The term also |

| |may be used to describe the integrity and management ability of individuals managing a corporation. As used by lenders, |

| |character does not mean the citizenship or moral rectitude of an individual. |

|charge-backs |The reduction of unpaid invoices owed to a trade creditor due to a dispute, return, offset, or any reason other than an |

| |account debtor's inability to pay. |

|chattel |An archaic term for personal property that was common in many states before the adoption of the UCC. The term is used |

| |almost exclusively by bankers and lawyers who were trained before the adoption of the code. |

|chattel mortgage |An archaic term for a security agreement. |

|chattel paper |A category of personal property defined by Article 9 of the UCC. Chattel paper is a document that includes both a |

| |monetary obligation and a security interest in goods or a lease. For example, installment sales contracts that include a|

| |retail purchaser's promise to pay and a security interest retained by the seller become chattel paper for a bank when |

| |the seller pledges them to another party. Such a document is often called dealer paper because automobile dealers |

| |engaged in indirect lending frequently sell or pledge their retail installment contracts to a financial institution. |

|cheapest to deliver |The cash market instrument that is the least expensive instrument to acquire and deliver into an exchange-traded |

| |contract at maturity. |

|check |A commercial demand deposit instrument signed by the maker and payable on the presentation to the bank on which it is |

| |drawn. |

|Check 21 Act |The Check Clearing for the 21st Century Act (Pub. L. No. 108-100 - signed by President Bush on October 28, 2003). The |

| |law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks |

| |to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that|

| |want to continue receiving paper checks. A substitute check is the legal equivalent of the original check and includes |

| |all the information contained on the original check. The law does not require banks to accept checks in electronic form |

| |nor does it require banks to use the new authority granted by the Act to create substitute checks. Check 21 is designed |

| |to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to |

| |check truncation. |

|check truncation |A process whereby deposited checks are retained by the fist bank (payee’s bank) with notification sent to the local bank|

| |(payor’s bank) that the check has been deposited. Canceled checks are not returned to the maker. Sometimes called check |

| |safekeeping. |

|check-clearing float |The time between the date a check is deposited in a bank and the date it is charged to the drawer. Also called bank |

| |float or transit float. |

|Chicago Board of Trade (CBOT) |A futures exchange. |

|Chicago Mercantile Exchange (CME) |A futures exchange. |

|CHIPS |See Clearing House Interbank Payment System. |

|chose in action |A personal right to receive or recover a debt or damages, but only through a lawsuit. |

|churning |The process of unnecessary purchases and sales in customers’ accounts for the purpose of generating commissions. |

|CIP |See customer identification program. |

|class |See tranche. |

|clean letter of credit |A letter of credit that can be drawn upon with a simple written request not supported by other documentation. Often used|

| |to identify or describe standby letters of credit. This type of letter of credit is often used to enhance the credit |

| |quality of securities. |

|clean REMIC |See sequential-pay REMIC. |

|clean up (v.), clean-up (adj.),or |(1) An informal phrase used by lenders to describe a provision in loan documents, usually the promissory notes used for |

|cleanup (n.) |lines of credit. The clean-up provision requires that the loan balance outstanding under the line of credit be reduced, |

| |usually to zero, for a period of time, usually one or two months, with some specified frequency, usually annually. |

| |Sometimes called an "out of debt" requirement. A clean-up requirement is particularly well suited to borrowers with |

| |significant seasonal fluctuations in sales. |

| |(2) The unwinding of an asset-backed security when the remaining balance is very small is sometimes referred to as a |

| |clean-up call. |

|clear |The collection of funds on which a check is drawn and the subsequent payment of these funds to the holder of the check. |

|clearing account |An account used to accumulate total charges or credits so that they can be distributed later among the accounts to which|

| |they are allocable, or so that the net differences can be transferred to the proper account. |

|clearing corporation |An agency connected with a financial exchange through which brokers and other parties to a securities trade settle |

| |trades conveniently, with minimum paperwork. Financial settlements are simplified by combining and netting transactions.|

| |Sometimes called a clearinghouse. |

|Clearing House Interbank Payment System |A privately owned electronic system in New York City that is used to transfer funds between banks. Often used for funds |

|(CHIPS) |moving into and out of the United States. See Fed wire and Society for Worldwide Interbank Financial Telecommunication |

| |(SWIFT). |

|CLO |See collateralized loan obligation. |

|closed-end credit |Credit extensions in which the borrower receives the entire proceeds of the loan at or shortly after the loan is closed.|

| |In closed-end credit facilities, the amount borrowed cannot increase after it has been disbursed and partially repaid. |

| |Closed-end credit may require regular repayment of principal (see installment note and term note) or may only require |

| |the repayment of principal at maturity. See bullet loan, single-payment loan, and time note. |

|closed form solution |A solution to a math problem that can be obtained from simple formulas. Risk modelers and investors can use closed form |

| |solutions such as Black-Scholes or Vasicek models to value options. Also known as analytical solution. See one-factor |

| |model. |

|CLTV ratio |See combined loan to value ratio. |

|CME |See Chicago Mercantile Exchange. |

|CMIR |Report of International Transportation of Currency or Monetary Instruments. Each person who physically transports, |

| |mails, or ships, or causes to be physically transported, mailed, shipped or received currency or other monetary |

| |instruments in an aggregate amount exceeding $10,000 on any one occasion from the United States to any place outside the|

| |United States, or into the United States from any place outside the United States must file form 4790 (CMIR). |

|CMO |See collateralized mortgage obligation. |

|CMT |See constant maturity Treasury. |

|COFI |See cost-of-funds index. |

|cognovit note |A promissory note that includes language in which the debtor acknowledges liability and allows the creditor to obtain a |

| |judgment without suit. Not permitted in some states. |

|coinsurance |A provision in an insurance policy that requires the insured to carry an amount of insurance equal to a certain |

| |specified percentage of the value of the insured property. The coinsurance provision, or clause, provides for full |

| |payment of losses up to the amount of the policy if the amount of insurance carried equals the specified coinsurance |

| |percentage. If the amount of insurance carried does not equal the specified coinsurance percentage, the losses are |

| |shared between the insurer and the insured even if the loss is below the amount of the policy. |

|collar |(1) The combination of a cap option and a floor option. |

| |(2) For CMOs, the collar is the range in which certain performance variables (e.g., yield, average life) are guaranteed |

| |to stay. This range is expressed in terms of PSA speeds. See band. |

| |3) An informal name for caps and floors. |

|collateral |(1) Property that a debtor has pledged, mortgaged, or assigned to a creditor. |

| |(2) Securities exchanges in a repo, reverse repo, buy/sellback, or sell/buyback. |

|collateral receipt |See warehouse receipt. |

|collateral trust bonds |A type of corporate bond that employs a trustee to hold collateral, other than equipment or real estate, for the bond |

| |holders. For example, a parent corporation may borrow funds through a bond issue and pledge the stock in one of its |

| |subsidiaries as collateral for the bondholders. |

|collateralized bond obligation (CBO) |A multi-tranche security secured by a pool of corporate securities (generally noninvestment-grade corporate bonds) or |

| |sovereign debt. Similar to the more familiar CMO, except that in a CBO the tiers or tranches are created with differing |

| |levels of credit quality. The CBO structure creates at least one tier of investment-grade bonds, thus providing |

| |liquidity to a portfolio of junk bonds. CBOs are a type of CDO. See collateralized debt obligation (CDO), special |

| |purpose vehicle and waterfall. |

|collateralized debt obligation (CDO) |(1) A multi-tranche security with credit risk exposure to corporations. A securitization of corporate obligations. CDOs |

| |can be securitizations or re-securitizations of commercial loans, corporate bonds, other types of ABSs, residential |

| |MBSs, commercial MBSs, and emerging market debt. CDOs may even be backed by other CDOs. Securitizations of corporate |

| |bonds are a type of CDO called a collateralized bond obligation or CBO. A synthetic CDO uses credit default swaps rather|

| |than actual corporate obligations to create a pool of credit exposure. Similar to the more familiar CMO, except that in |

| |a CDO the tiers or tranches are created with differing levels of credit quality. A CBO divides the credit risk of a pool|

| |of high yield bonds into different classes that appeal to investors with different credit risk tolerances. The CDO |

| |structure creates at least one tier of investment-grade bonds. The contractual rules for the cash flow distributions in |

| |a CDO structure enable the senior tranches to receive high credit ratings by shifting risk to the equity tranche. See |

| |equity tranche, special purpose vehicle, and waterfall. |

| | |

| |(2) The term "CDO" may be used to refer to the special purpose entity, SPV, that holds the securitized assets. |

|collateralized loan obligation (CLO) |A multi-tranche security secured by a pool of corporate loans. Similar to the more familiar CMO, except that in a CBO |

| |the tiers or tranches are created with differing levels of credit quality. The CBO structure creates at least one tier |

| |of investment-grade bonds, thus providing liquidity to a portfolio of junk bonds. |

|collateralized mortgage obligation (CMO)|A type of MBS created by dividing the rights to receive the principal and interest cash flows from an underlying pool of|

| |mortgages into separate classes or tiers. The tiers or classes are usually called tranches. In other words, it is a |

| |multiclass bond backed or collateralized by mortgage loans or mortgage pass-through securities. A given tranche is |

| |typically not redeemed until all bonds with earlier priority have been redeemed. By dividing the cash flows into one or |

| |more tranches with shorter terms, the risk resulting from the potential volatility from future changes in prevailing |

| |rates is shifted away from the shorter-term tranche or tranches and onto the longer-term tranches and the residual |

| |tranche. |

|collected balances |Collected balances are bank ledger balances minus checks in the process of collection. Also called available balances, |

| |good funds, or usable funds. |

|collection |Obtaining payment. |

|collection float |The total time period between when a check is prepared by the remitter and when the check is presented to the remitter’s|

| |bank. The float also includes the mail float, processing float, and transit float, and is considered the disbursement |

| |float for the organization that issues the check. |

|collection guaranty |A guaranty in which the signer guarantees to pay the bank only if the bank cannot obtain repayment through other means. |

|combined loan to value ratio (CLTV) |A measure of collateral coverage provided by a consumer borrower's residence. The borrower's total senior and |

| |subordinated loan balances divided by the appraised value of the borrower's residence. |

|commercial letter of credit |An obligation issued by a bank on behalf of a bank customer to a third party. A commercial or trade letter of credit is |

| |a bank promise to pay the third party for the purchase of goods by the bank’s customer. If the bank’s obligation to pay |

| |is not immediate, the transaction can later give rise to a banker’s acceptance. Also called trade letter of credit. See |

| |banker's acceptance and letter of credit. |

|commercial loan theory of liquidity |An explanation of bank liquidity described by Adam Smith: short-term loans advanced to finance salable goods on the way |

| |from producer to consumer are the most liquid loans the bank can make. These are self-liquidating loans because the |

| |goods being financed will soon be sold. The loan finances a transaction and the transaction itself provides the borrower|

| |with the funds to repay the bank. Adam Smith described these loans as liquid because their purpose and their collateral |

| |were liquid. The goods move quickly from the producers through the distributors to the retail outlet and then are |

| |purchased by the ultimate cash-paying consumer. Also called the real bills doctrine. |

|commercial paper |Unsecured, short-term promissory notes issued by corporations for specific amounts and with specific maturity dates. |

| |Firms with lower ratings or firms without well-known names usually back their commercial paper with guarantees or bank |

| |letters of credit. Commercial paper may be sold on a discount basis or may be interest bearing. Terms can be as short as|

| |1 day and usually do not exceed 270 days. |

|commercial tort claim |A claim rising as a result of a tort that (a) does not include damages arising out of a personal injury or death and (b)|

| |arises out of the normal course of business from either an individual or organization. A category of personal property |

| |collateral defined by the 2001 revisions to Article 9 of the UCC. See tort. |

|commingled funds |Money pooled for a common purpose. Often funds pooled for investments. See local government investment pools. |

|commingled goods |Goods that become part of a product or mass of goods. An example is the flour used to bake bread. |

|commitment letter |A legally binding letter in which a lender documents the terms, prerequisites and conditions under which it agrees to |

| |provide financing to an applicant. Commitment letters may be used in almost any lending transaction but are most common |

| |in commercial real estate transactions. |

|Commodity Futures Trading Commission |The Federal agency that is responsible for regulating futures trading in the United States. |

|(CFTC) | |

|common stock |A type of equity or capital representing shares of ownership in a corporation. May or may not receive distributions of |

| |corporate income in the form of dividends. Receives the lowest priority for repayment in the event of a corporate |

| |liquidation. As opposed to preferred stock, which has a slightly higher claim to corporate funds. |

|Community Reinvestment Act |A federal statute enacted to require banks and savings and loan associations to meet the credit needs of their |

| |communities, including low- and moderate-income neighborhoods. |

|companion tranche |A specific tier or segment of REMIC security. A REMIC tranche that is structured to absorb a disproportionate amount of |

| |the volatility caused by variations in the prepayments of the underlying collateral. Companion tranches are created to |

| |be more volatile so that other tranches in the same REMIC, called PAC or TAC tranches, may have more stable cash flows. |

| |Hence the name companion. Also called support tranches. |

|compensating balance |A method of paying the bank for providing services. |

| |(1) In lending, compensating balances are minimum balances that the bank requires a borrower to maintain with the bank |

| |as partial compensation to the bank for the credit facility. |

| |(2) The amount of deposit balances necessary to offset the cost of deposit, cash management, or other bank services. |

| |Each period, usually monthly, the actual bank service charges applicable for the services used by the depositor are used|

| |to determine the level of balances to be left with the bank. Adjustments are made to reduce the deposit total for |

| |reserve requirements and float. See account analysis. |

|compilation statement |Financial statement put together for the client firm by a CPA that is entirely based upon data submitted to the CPA by |

| |the firm with no review, no testing, and no opinion expressed by the CPA. |

|complete appraisal |A term used in the Uniform Standards of Professional Appraisal Practice (USPAP) requirements for real estate appraisals.|

| |Synonymous with an appraisal as defined by the Federal appraisal regulations for real estate pledged to secure loans. A |

| |complete appraisal is a statement of market value that meets the five specific standards. A complete appraisal is |

| |conducted in conformity with USPAP rules and without invoking the departure provision in those rules. See appraisal, |

| |evaluation, and limited appraisal. |

|compliance risk |One of nine risks defined by the Office of the Comptroller of the Currency (OCC). The risk to earnings or capital |

| |arising from violations of or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards. |

| |This risk is incorporated in the Federal Reserve definition of legal risk. |

|compound interest |Interest computed by applying the simple rate of interest to calculate interest on principal plus interest on successive|

| |increments of interest earned in prior periods. |

|compound interest bond |See capital appreciation bond. |

|compound option |An option on an option. Examples are captions and floortions. |

|Comprehensive Environmental Response, |Imposes liability on owners and operators for cleanup of environmental sites. |

|Compensation, and Liability Act of 1980 | |

|comprehensive income |A term defined by FAS 130 as the change in equity of an entity during a reporting period that results from transactions |

| |and "other events and circumstances from nonowner sources." The "other events and circumstances from nonowner sources" |

| |are referred to as "other comprehensive income." Accordingly, comprehensive income is the change in equity during a |

| |reporting period that results from the combination of net income and other comprehensive income. See FAS 130 and also |

| |see other comprehensive income. |

|concentration account |A cash management tool. A single account established by an entity, usually in conjunction with one or more zero balance |

| |disbursement accounts. Sometimes the concentration account is referred to as a parent account while the associated zero |

| |balance accounts are called daughter or subsidiary accounts. |

|concession |The underwriting spread. The difference between the price that an underwriter or underwriting syndicate pays to the |

| |issuer and the price that is received from investors who buy the issue. The concession is the income earned by the |

| |underwriter. |

|conditions |A term used by lenders and credit analysts to describe the background or underlying economic and industry circumstances |

| |affecting a business. |

|confidence interval |The degree of certainty that an event will fall outside of boundaries on a distribution. For a normal distribution, |

| |boundaries set at two standard deviations from the mean create approximately 95 percent confidence intervals. In other |

| |words, only 5 percent of the events will be smaller or larger than the boundary amounts. Often applied to VaR measures |

| |of risk. |

|confirmation |The document used to state in writing the terms of a trade that were previously agreed to orally by the buyer and the |

| |seller. |

|conformed copy |A copy of an original document on which the signature, seal, and other such authenticating features are typed or |

| |otherwise noted. |

|conforming mortgage |A residential mortgage loan that meets all FNMA or FHLMC standards. Mortgages may conform to agency requirements |

| |regardless of whether they are sold or retained by the originator. Even though a conforming mortgage may not be sold to |

| |FNMA or FHLMC, its amount, repayment terms, and documentation meet the standards of those agencies, and the loan may be |

| |sold to them at any time during its life. |

|consensual lien |A security interest given to a creditor by a debtor. A consensual lien is granted by the consent of the parties and is |

| |the basis for most secured transactions. See judicial lien and statutory lien for alternative types of liens. |

|consideration |A legal term used to describe the benefit that a borrower, guarantor, or pledgor receives in exchange for agreeing to |

| |repay, guarantee, or pledge security to the bank. Usually, but not always, the consideration is the proceeds of the |

| |loan. In some states, a reasonable expectation of benefit can be sufficient. Consideration must involve benefit that is |

| |meaningful, which means that the value of the consideration, whether or not it is directly monetary, must be comparable |

| |to the benefit. |

|consignment |(1) (adjective) — Goods or inventory that are held by a selling agent, wholesaler, or reseller until the goods are |

| |either sold or returned to the seller. |

| |(2) (verb) — The physical transfer of goods from a seller/consignor who retains title to a consignee who acts as a |

| |selling agent. |

|consolidated statements |Consolidated financial statements show the combined assets, liabilities, net worth, income, expense, net income, and |

| |cash flows for a related group of companies. Unlike simpler combined statements, consolidated statements do not merely |

| |show the aggregate of the values for each line item for all of the firms in the group. Instead, consolidated statements |

| |also reflect the elimination of intercompany transactions. Consolidated statements disregard the distinction between |

| |separate legal entities and treat a parent firm and its subsidiaries as a single economic entity. |

|consolidating statements |Consolidating financial statements are reports or worksheets that show the financial condition of each entity in a |

| |consolidated group of entities as well as the intercompany eliminations used in the preparation of consolidated reports.|

|constant maturity Treasury (CMT) |An average of the yields from various Treasury securities that all have the same remaining time until maturity. For |

| |example, the one-year CMT is the average yield of various Treasury securities maturing in one year. CMT indexes are |

| |published by the Federal Reserve Board of Governors in statistical release H.15. |

|constant percent prepayment (CPP) |An expression of mortgage loan prepayments in annual terms. The single monthly mortality rate (SMM) multiplied by 12. |

| |CPP annualizes SMM without reflecting the impact of compounding. See constant prepayment rate and single monthly |

| |mortality rate. |

|constant prepayment rate (CPR) |A measure of the historical or expected prepayment of principal on a mortgage or an MBS that expresses the prepayment as|

| |a constant proportion of the outstanding principal. The CPR is an annualized expression of the SMM that reflects |

| |compounding and is therefore more accurate. See single monthly mortality rate. |

|consumer goods |A category of goods defined by Article 9 of the UCC. Consumer goods are goods used primarily for personal, family, or |

| |household purposes. Typical examples are jewelry, furniture, automobiles, and appliances. |

|consumer lease |A consumer lease is defined under Article 2A of the UCC. It is a lease between a lessor who regularly engages in the |

| |business of leasing or selling to a lessee who is an individual and who takes the lease for personal, family, or |

| |household purposes. To meet the definition of a consumer lease, the total payments to be made under the lease, excluding|

| |payments for options to renew or buy, may not exceed $25,000. Any prohibitions on a party’s right to transfer its rights|

| |in a consumer lease must be in writing, conspicuous, and specific. |

|Consumer Leasing Act |A federal law that governs consumer leases. The act is implemented by Federal Reserve Regulation M. Compliance with the |

| |Consumer Leasing Act is largely, but not entirely, a matter of providing the consumer with required disclosures intended|

| |to enable the consumer to compare different leases. |

|contingent deferred sales charge (CDSC) |See back-end load. |

|contingent liability |A debt or obligation that becomes a liability only when something else happens. For example, a guarantor becomes liable |

| |for his guarantee only if the debt that is guaranteed does not get paid by the debtor. |

|continuation |A form and process by which a secured party extends the priority of its security interest in the public record. The |

| |priority of liens created under Article 9 of the UCC is usually established by filing a financing statement. Under the |

| |provisions of Article 9, financing statements are only valid for five years. However, a financing statement can be |

| |renewed by filing a continuation statement, usually a UCC-3 form. Continuations must be filed no earlier than six months|

| |prior to the expiration of the financing statement and no later than the expiration date of the financing statement. |

| |Continuations last for five years and can be extended by filing another continuation. |

|continuing guaranty |A guaranty in which the guarantor agrees to guarantee all future loans made to that borrower by the bank, not just the |

| |loan or loans made as part of the transaction in which the guaranty was obtained. |

|continuous repo |A repo/reverse repo transaction that does not have a specified term. These transactions are like a series of overnight |

| |repos renewed daily. The repo rate, the amount of funds invested, and/or the amount of collateral is adjusted each day. |

| |Continuing repos are commonly used in conjunction with bank sweep accounts. Under a continuing repo agreement, the |

| |transaction is terminated whenever either party requests termination. Also called open repos. |

|contra account |Accounts receivable due from debtors who also have accounts payable due to them from the borrower. |

|contra asset |An asset account that normally has a credit balance. Examples are the allowance for doubtful accounts and accumulated |

| |depreciation. |

|contra liability |A liability account that normally has a debit balance. |

|contract right |A defined term under the 1962 version of the UCC that means a right to payment under a contract that has not yet been |

| |earned by performance and is not evidenced by an instrument or chattel paper. Under the 1972 version of the UCC, these |

| |rights are either accounts or general intangibles. |

|contractual gap |A crude measure of a financial institution’s exposure to adverse consequences resulting from changes in prevailing |

| |interest rates. The contractual gap is a gap mismatch measure calculated using the contractual maturity and repricing |

| |dates for all assets and liabilities. It is arguably the least accurate gap methodology. |

|control stock |Control stock is stock held by a person who directly or indirectly controls the management of the issuing company. The |

| |right of the owner or a pledgee to sell control stock is limited by provisions in the Securities and Exchange Acts. |

|controlled disbursement bank |A bank that can provide better management control over checks being presented. Generally, this bank is located outside |

| |the local area and receives only presentments from the Federal Reserve System and the local clearing-house. |

|conventional mortgage |A mortgage loan based solely upon the value of the mortgaged real estate and the creditworthiness of the borrower. A |

| |mortgage loan without insurance or guarantees from a government agency. |

|convergence |Describes an inevitable change in the relationship between cash and futures prices for instruments until delivery. Prior|

| |to delivery, the futures price and the cash price differ by the cost of carry. As time passes, the cost of carry |

| |diminishes and the futures price will equal the cash price at the time of delivery. This is a necessary condition for |

| |the futures contract to effectively hedge the cash instrument. |

|conversion premium |A convertible’s conversion premium is the amount by which a convertible’s market price exceeds its value in stock. The |

| |premium may be expressed as the dollar difference or as a percentage. |

|conversion ratio |The specified number of shares of common stock that will be received for each convertible bond or share of convertible |

| |preferred stock at the time of conversion. This ratio is specified at issuance in the bond indenture agreement. This is |

| |often an uneven amount using partial shares. |

|conversion value |For convertibles, the value in stock. Also called the parity value. The conversion value can be determined by |

| |multiplying the conversion ratio by the value of the stock at any point in time. |

|convertible ARM |An ARM for which the borrower has the option to convert from a floating-rate loan to a fixed-rate loan. Convertible ARMs|

| |can typically be converted in the first through fifth years of the mortgage loan. Because borrowers can exercise their |

| |conversion option for a modest fee, conversion is more attractive to borrowers than the alternative of obtaining a |

| |nonconvertible ARM and then later refinancing with a fixed-rate loan when prevailing rates have fallen. Consequently, |

| |prepayment speeds for convertible ARMs are faster than prepayment speeds for nonconvertible ARMs. |

|convertible bond |A bond that includes a provision allowing the holder to exchange the bond for a quantity of the issuer's common stock at|

| |some fixed exchange ratio. An otherwise normal corporate bond that has a fixed maturity date that pays coupon interest |

| |and repays principal at maturity. It is issued with an option to exchange the bond for a fixed number of shares of |

| |common stock at the option of the bondholder, thereby allowing the convertible bond to share in the growth potential of |

| |the underlying common stock. It is senior to stock within the corporate equity structure, although probably junior to |

| |other corporate debt. Convertible bonds are often callable. |

|convertible debt spread |The difference between the coupon interest rate on the convertible and the coupon interest rate on the issuing company’s|

| |nonconvertible bonds. The amount by which the convertible’s interest is lower depends on a number of factors, including |

| |the structure of the convertible itself. The debt spread typically ranges from two to five percentage points. |

|convertible preferred stock |Preferred stock that can be converted into the common stock of the issuing company. Like nonconvertible preferred stock,|

| |the convertible preferred stock is a class of the corporation’s capital stock; has a specified dividend rate that is |

| |usually declared quarterly and is cumulative (accumulates in arrears if the corporation does not make the payment); and |

| |has priority over common shares for dividend payments. Both convertible and nonconvertible preferred stock are |

| |considered to be perpetual, but in fact, both are callable. Call dates on convertible preferreds are specified in the |

| |prospectus at issuance. |

|convexity |A measure of the sensitivity of duration to changes in yield levels. Convexity is a measure of the stability or |

| |instability of the measured duration over a range of yields. If convexity is low, that is, if the price/yield |

| |relationship is close to a straight line, duration is stable. If convexity is high, duration is unstable. The greater an|

| |instrument’s convexity, the less accurate duration will be. See duration, effective duration, Macaulay duration and |

| |modified duration. |

|COP |See certificate of participation. |

|core deposits or core funding |(1) A bank's deposits that are the most stable. |

| |(2) A bank's deposits under $100,000 each. |

| |(3) Deposits that have an indefinite maturity, such as checking accounts, NOW accounts, money market deposit accounts, |

| |and savings accounts. See retail deposits. |

|corporate settlement |The agreement of a buyer and seller to exchange the security and the payment on the third business day after the trade |

| |date. See regular way settlement and settlement. |

|correlation |The degree of relationship between two sets of data. A correlation near plus 1, called a positive correlation, indicates|

| |that changes in one set of data are closely related to changes in the other set and that the data sets change in the |

| |same direction. A correlation near minus 1, called negative correlation, indicates that changes in one set of data are |

| |closely related to changes in the other set and that the data sets change in the opposite direction. A correlation near |

| |zero indicates little or no relationship between the changes in the two sets of data. |

|correlation VAR |Correlation VAR is a measure of a financial instrument’s, a portfolio of financial instruments,’ or an entity’s exposure|

| |to reductions in value resulting from changes in prevailing interest rates. Also called analytical VAR, correlation VAR |

| |is one of several different methods for calculating VAR. Analytical or correlation VAR compares the sensitivity of risk |

| |elements within a portfolio. The volatility of each component is then calculated using a standard matrix. This is the |

| |type of VAR calculated by popular models such as RiskMetrics. This is the least computationally insensitive of the three|

| |statistically based VAR measurements. However, this approach does not do a good job of reflecting option risk or of |

| |incorporating the risk of unlikely events. See empirical VAR, historical VAR and value at risk (VAR). |

|correspondent bank |A bank that serves as a depository and provides banking services for another bank. |

|cosigner, co-maker and co-obligor |Terms used to identify multiple parties who sign as borrowers for a loan. |

|COSO |(1) The Committee of Sponsoring Organizations of the Treadway Commission. Formed in 1985 by five U.S. professional |

| |organizations to sponsor the National Commission on Fraudulent Financial Reporting. This was an independent, private |

| |sector initiative. The committee developed recommendations used by financial auditors, the SEC and regulators. |

| |(2) The name most commonly used to refer to guidelines for enterprise-wide risk management (ERM) called "Internal |

| |Control - Integrated Framework". These COSO guidelines now serve two purposes. |

| |They are used by internal and external auditors to implement and evaluate a firm's financial controls. The 2002 |

| |Sarbanes-Oxley Act and similar legislation is a primary driver of this application. |

| |Financial institutions are also using COSO guidelines for ERM in general but primarily for the identification and |

| |control of operations risk. The Basel II capital requirements and related rules issued by national banking regulators |

| |are a primary driver of this application. |

| |See enterprise-wide risk management, operations risk and self-assessment. |

|cost in excess of billing |An asset created under a type of accrual accounting used when firms such as contractors incur expenses in accounting |

| |periods that are repaid in subsequent accounting periods. This account is comprised of money spent by the contractor for|

| |things that will be billed to buyer at a future date. |

|cost of carry |The cost of financing an asset. If the cost of carry is smaller than the interest received from the asset by the |

| |investor, the investor has a positive carry. Conversely, if the cost of carry is larger than the interest received from |

| |the asset by the investor, the investor has a negative carry. |

|cost-of-funds index (COFI) |The weighted-average interest rate paid by savings institutions to obtain funds. There are national and regional |

| |cost-of-fund indexes. The most common is the 11th District Federal Home Loan Bank COFI. A specific COFI index may be |

| |used as a benchmark rate for a floating-rate security. |

|cost of goods sold |Amount shown on a firm's income statement representing the direct expenses that the firm incurred for sales. Cost of |

| |goods sold is always a debit balance and is shown as either a deduction or a negative number. |

|counter balancing capacity (CBC) |A term sometimes used to describe the quantity of funds that a financial institution can obtain to meet liquidity |

| |requirements. See forward cash exposure. |

|counterparty |A term used to identify the "other" party in a two-party transaction. For example, the counterparty of a buyer is the |

| |seller to that buyer. The term counterparty is frequently used to identify the other party in repurchase agreement |

| |transactions and in interest rate swap transactions. |

|counterparty risk |The risk that a counterparty will default (fail to perform) on its obligation under a contract. Counterparty risk is not|

| |limited to credit risk (the risk that the counterparty cannot fulfill its contractual obligations) but may also result |

| |from other problems associated with a counterparty unwilling to honor the contract. |

|coupon leverage |The inclusion of a multiple in the formula for calculating the coupon rate on an inverse floating-rate CMO. For example,|

| |an inverse floater with a multiple may pay interest at the rate of 22 percent minus the product of 2 times the 1-month |

| |London Interbank Offered Rate (LIBOR). (Note that when the rate formula for a floater or inverse floater applies a |

| |multiple to a sum, the CMO tranche is called a super floater. See super floater.) |

|coupon yield equivalent |See bond equivalent yield. |

|coupon, coupon rate |(1) The rate of interest received by the holder of a security. Not necessarily the same as the yield realized by the |

| |holder. See rate. |

| |(2) For pass-through securities, the holder’s coupon rate is the gross coupon of the underlying loans less servicing |

| |fees and any agency guarantee fees. |

|covariance |A measurement of the relationship between two variables. The arithmetic mean of the products of the deviations of |

| |corresponding values of two quantitative variables from their respective means. |

|covariant |The condition of varying with something else in a way that satisfies a mathematical relationship. See covariance. |

|covenants |Restrictions on the activities of a debtor written into bank loan agreements or bond indenture agreements. Also called |

| |indenture covenants or protective covenants. Contractual terms of the loan or indenture agreement that prohibit the |

| |debtor from taking actions that might hurt the interests of the lenders or bondholders. Designed to protect the |

| |interests of creditors — often (but not limited to) unsecured creditors. Four common examples of covenants are |

| |prohibitions against: issuing new debt, paying dividends if certain minimum financial standards are not maintained, |

| |merging with another company, and selling corporate assets. |

|covered calls |A call option for which the owner of a security grants the buyer of the call option the right to purchase a security |

| |owned by the option seller. The opposite of naked calls. In theory, selling covered calls can be a hedging strategy. If |

| |investment prices fall, the investor’s loss will be offset by the income from the covered call. (When prices fall, the |

| |call option is likely to expire unexercised because the call buyer can buy the security on the open market at a lower |

| |price.) On the other hand, if prices rise, the seller's gain is limited to the difference between the seller's book |

| |value and the option strike price (which in this case is probably less than the market price), but the seller also |

| |retains the proceeds of the option sale. For banks, regulatory restrictions as well as practical difficulties may |

| |restrict the suitability of covered calls as hedging tools. |

|covered put |The sale of a put option while holding sufficient cash to buy the underlying. |

|CPLTD |Acronym for current portion of long-term debt. |

|CPP |See constant percent prepayment. |

|CPR |See constant prepayment rate. |

|CRA |See Community Reinvestment Act. |

|cram down |An informal name for a settlement or terms that a debtor forces creditors to accept. For example, a debtor in Chapter 11|

| |bankruptcy proceedings can, subject to some restrictions, have a plan to resolve the bankruptcy approved by the court |

| |even though a creditor or a class of creditors objects. |

|credit default swaps |See credit swap. |

|credit derivative |Contractual arrangements that allow one party to transfer credit risk of a reference asset, which it may or may not own,|

| |to one or more counterparties. The first party may be called the "protection buyer", the "beneficiary" or the |

| |"originator". The counterparty or counterparties may be called the "protection seller" or the "guarantor". Credit |

| |derivatives are contracts for transferring risk - just like foreign exchange, commodity and interest rate risk |

| |derivatives. The only difference is the type of risk transferred. See total return swaps, credit default swaps, credit |

| |linked note and credit options for definitions of specific types of credit derivative instruments. Also see reference |

| |asset. |

|credit enhancement |A measure that alters the structure of a security in a way that reduces its credit risk. Credit enhancement may take the|

| |form of a letter of credit issued to back securities. For mortgage-backed and asset-backed securities, credit |

| |enhancement may take the form of arrangements to over-collateralize the security. |

|credit event |A term used in credit swap and some other credit related contracts. The specified credit event in each contract is |

| |defined by the parties to suit their particular needs. Typical specified credit events are bankruptcy, insolvency, |

| |credit rating downgrade or failure to make a required scheduled payment. Note that for a credit swap transaction, these |

| |events do not refer to occurrences or change impacting one of the contract counter parties. Instead they refer to events|

| |applicable to the underlying reference asset. The defined events must be well-defined and unambiguous. |

|credit history |A record of how a person has borrowed and repaid debts. |

|credit linked note |A type of credit derivative instrument. Credit linked notes are a securitized form of credit derivatives. The protection|

|credit linked security |buyer issues notes. If a specified credit event occurs, the investor who buys the notes has to suffer either a delay in |

| |repayment or has to forego interest. (The specified credit event is pre-defined can be any one of a number of |

| |alternatives.) Also known as credit linked security. |

|credit memos |Accounting adjustments that reduce account receivable balances due from account debtors. Usually credit memos are |

| |generated to account for merchandise that is returned and when credit is given to customers for damaged goods. Credit |

| |memos are the accounting reflection of charge-backs. |

|credit migration |Improvement or deterioration in an obligor's credit worthiness over time. Most often used to describe the improvement or|

| |deterioration in the credit worthiness as represented by a rating or credit grade. |

|credit options |A type of credit derivative instrument. Options on a credit spread take the form of credit-spread put options. The |

| |put-buyer pays an upfront fee to the put-seller in exchange for a contingent payment in the event that the credit spread|

| |for an asset rises beyond a pre-agreed upon threshold. This is a put option where the underlying is the spread on a |

| |third party security. For example, if you were holding a bond issued by a third party and the bond's spread over the |

| |comparable Treasury rate were 200 basis points, you might purchase an option that pays off if the spread widens to 300 |

| |basis points. (Although that example uses the Treasury rate as a basis for comparison, it is becoming more common to use|

| |swap rates.) In other words, the widening of the credit spread to a defined size gives the protection buyer the right to|

| |demand a payment from the protection seller. Unlike a total return or default swap, the parties in a credit spread |

| |option do not have to agree upon any specific credit events. The fact that the market spread for the underlying rises |

| |compared to the reference index rate is, in effect, a proxy for a deterioration in the credit quality. Also known as |

| |credit spread options and credit spread put options. |

|credit risk |The risk to earnings or capital from the potential that a borrower or counterparty will fail to perform on an |

| |obligation. Usually, but not always, the obligation in question is a requirement to make interest or principal payments.|

| |Sometimes called default risk, the failure to make required payments reduces the value of equity securities, debt |

| |securities, and loans. In the extreme, credit defaults eliminate all or almost all of the value in loans or securities. |

| |Adverse consequences from credit risk are not restricted to default, the ultimate manifestation of credit risk. In |

| |addition, asset owners can suffer from reductions in value resulting from either real or perceived declines in the |

| |obligor’s financial strength. |

| |Both the Office of the Comptroller of the Currency (OCC) and the Federal Reserve list credit risk as one of their |

| |defined risk types for risk-based examinations. Credit risk exposure is found in all activities in which success depends|

| |on the performance of a counterparty, issuer, or borrower. Credit risk arises any time a financial institution extends, |

| |commits, invests, or otherwise exposes its funds through actual or implied contractual agreements, whether reflected on |

| |or off the balance sheet. |

|credit scoring system |A statistical system used to determine whether or not to grant credit by assigning numerical scores to various |

| |characteristics related to creditworthiness. |

|credit spread options |See credit options. |

|credit swap |A type of credit derivative instrument. Swap contracts in which one party makes payments only if a specified credit |

| |event occurs. In a credit default swap, the protection seller agrees, for an upfront or periodic fee, to compensate the |

| |protection buyer upon the happening of the specified credit event. Credit default swaps are similar to a traditional |

| |financial guarantees but more flexible. It is more flexible because a credit swap need not be limited to compensation |

| |upon an actual default. The specified credit event in each swap is defined by the parties to suit their particular |

| |needs. Variations of the basic structure outlined in this definition are also used. Also known as default swaps or |

| |credit default swaps. See credit derivative, credit event and reference asset. |

|credit watch |A warning issued by a credit rating agency alerting investors that the current rating is under review and may be |

| |upgraded or downgraded. |

|creditor |A party who is owed money by another party. |

|creditworthiness |A creditor's measure of a consumer's past and future ability and willingness to repay debts. |

|critical path |A sequence of those tasks (e.g., in payment processing) which must be completed before the next task can be started. |

| |Anything not on the critical path is something that can be done later without delaying an important step. |

|cross collateralization |Extension of the creditor's interest in property of the debtor so that collateral for one debt also serves as collateral|

| |for one or more other debts. |

|cross correlation |Statistical term for the degree of similiarity for two different sets of data. |

|cross default |Provision in the loan documents in which the debtor agrees that default on one loan will also constitute default on |

| |other obligations to the creditor. |

|cross hedge |A hedge transaction in which a cash market instrument is hedged by an option contract for a different underlying |

| |instrument. Sometimes called proxy hedge, surrogate hedge, or tandem hedge. |

|cross stream guaranty |A phrase sometimes used to describe a guaranty of a loan to a borrowing entity when the borrowing entity is affiliated |

| |with the guarantor corporation through common ownership but is neither a parent nor a subsidiary corporation. For the |

| |purposes of this definition, the borrower and the guarantor do not necessarily have to meet the accounting definition of|

| |affiliates. |

|CSV |See cash surrender value. |

|cubic spline |A mathematical technique used for yield curve smoothing. A cubic spline fits a different third degree polynomial to each|

| |interval between data points (0 to 1 years, 1 to 2 years, 2 to 3 years, etc.) Either yields or prices can be smoothed |

| |using cubic splines. This smoothing technique is the most common and works well for spot rates. See smoothing. |

|cumulative gap |The net sum obtained by adding all of the interval gaps or mismatches between rate-sensitive assets and rate-sensitive |

| |liabilities beginning with the first bucket in the gap analysis and proceeding to a selected time. For example, the |

| |one-year cumulative gap is the sum of the gaps for all of the time intervals prior to and including the gap bucket |

| |ending one year from the date that the report was prepared. A crude and highly inexact measure of interest rate risk. |

|currency transaction report (CTR) |Each financial institution (other than casinos, which instead must file a CTRC form) must file a CTR for each deposit, |

| |withdrawal, exchange of currency or other payment or transfer, by, through or to the financial institution which |

| |involves a transaction in currency of more than $10,000 unless a CTR Exemption form has been previously filed. See Bank |

| |Secrecy Act. |

|current assets |The group of assets considered the most liquid. Usually comprised of cash, accounts receivable, inventory, and a few |

| |minor items. The subgrouping of assets into current and long-term categories is common for all financial statements |

| |except for firms in the financial industry. |

|current coupon |The term used to refer to all fixed-income securities paying interest at the rate currently required by purchasers for |

| |securities of that maturity and quality. Current coupon securities trade at or very near par. |

|current coupon yield curve |See yield curve. |

|current face |The total amount of the current principal outstanding of the loans in an MBS pool. The current face is always equal to |

| |the product of the original face multiplied by the current factor. Analogous to the par value of a conventional debt |

| |security. |

|current factor |See factor. |

|current liabilities |The group of liabilities considered to be the shortest term. Usually comprises accounts payable, short-term bank debt, |

| |bank overdrafts, other short-term accounts or notes payable, current portion of long-term debt, and a few minor items. |

| |The subgrouping of liabilities into current and long-term categories is common for all financial statements except for |

| |firms in the financial industry. |

|current ratio |The ratio obtained when total current assets are divided by total current liabilities. A commonly used but not always |

| |good proxy for a firm's liquidity. |

|current yield |(1) For bonds, a measure of the simple interest annual yield for investments with coupon rates and with maturities of |

| |one year or more. To calculate the current yield, the annual coupon interest income is simply divided by the amount paid|

| |to acquire the investment. It is important to note that the current yield is only accurate for investments purchased at |

| |par. The current yield calculation includes just one income cash flow - the annual coupon interest income. It ignores |

| |the profit or loss resulting from discounts and premiums. |

| |(2) For stocks, the annual dividend income divided by the price per share. |

|cushion bonds |An informal name for callable bonds with long maturities that have coupon rates well above current market rates. Because|

| |these bonds have such high coupon rates, they trade at prices and yields calculated to the call date rather than to the |

| |maturity date. This makes the cushion bond’s price less volatile. If prevailing rates remain the same, fall, or rise to |

| |any level not greater than the coupon rate, the bond will offer a competitive return. Even if rates do rise to exceed |

| |the coupon rate, the cushion bond offers a higher yield in exchange for its longer maturity since the premium paid at |

| |purchase can be amortized over a longer period. |

|CUSIP number |A nine-digit letter and number combination established by the Committee on Uniform Securities Identification Procedures |

| |(CUSIP) that is used to identify publicly traded securities. Each publicly traded security receives a unique CUSIP |

| |number when the security is issued. |

|custodial agreement |A written contract establishing the responsibilities of a custodian who holds property. In finance, the custodian holds |

| |collateral for deposits with financial institutions, investment securities, or securities underlying repurchase |

| |agreements. |

|custodial credit risk |The risk that a financial instrument owner will suffer a loss resulting from the default of a third party that holds the|

| |financial instrument. The third party might be a safekeeping agent or a secured creditor. The financial instruments are |

| |typically deposits or securities. |

|customer identification program (CIP) |A proposed requirement under the Bank Secrecy Act that all financial institutions implement a written, risk-based |

| |customer identification program, maintain information used to verify identities and compare the names of new customers |

| |against government lists of known or suspected terrorists or terrorist organizations. The proposed rule would apply to |

| |all customers seeking to open new accounts. |

|cyclical liquidity risk |A type of systemic liquidity risk. The risk of funding problems arising from national or regional macroeconomic |

| |corrections, such as recessions or credit crunches. |

D

|dampening |The phenomenon or the result of a declining volatility trend. |

|data mining |Obtaining information about customers or groups of customers from a data warehouse for marketing or other purposes. |

|data warehouse |A computerized database composed of data extracted from the data processing and accounting systems used for various bank|

| |deposit, loan, and other customer products. Typically, data is extracted from the various product systems, balanced, |

| |scrubbed, and converted into a standardized, readily accessible format. |

|dated billings |Receivables created by invoices that do not require the account party to pay until some date in the future. Sometimes |

| |called datings. |

|day basis |See accrual convention. |

|day count basis |See accrual convention. |

|daylight overdraft |A negative position in a bank's Federal Reserve account that occurs at any time during the business day. |

|days inventory |The level of inventory expressed as its equivalent in days of a portion of cost of goods sold for the year. Calculated |

| |by multiplying inventory by 365 and then dividing that product by cost of goods sold. |

|days payables |The level of accounts payable expressed as its equivalent in days of a portion of cost of goods sold for the year. |

| |Calculated by multiplying accounts payable by 365 and then dividing that product by cost of goods sold. |

|days receivables |The level of accounts receivable expressed as its equivalent in days of a portion of net sales for the year. Calculated |

| |by multiplying accounts receivable by 365 and then dividing that product by net sales. |

|DDA |See demand deposit. |

|dealer |A firm or an individual who buys and sells for his own account. A dealer has ownership, even if only for an instant, |

| |between a purchase from one party and a sale to another party, and is thus compensated by the spread between the price |

| |paid and the price received. Not the same as a broker, although an individual or firm may act as either a broker or a |

| |dealer in separate transactions. |

|dealer paper |Retail installment sales contracts, often for automobiles, that are sold or pledged to a third party, usually a |

| |financial institution. See chattel paper. |

|debentures |Unsecured, long-term corporate bonds. Even though debenture holders are not protected by collateral, they still have a |

| |legal right to repayment. In the event of default, debenture holders are treated like other unsecured creditors. In |

| |addition, debenture holders may benefit from indenture restrictions. |

|debt |Funds owed by a debtor to a creditor. Outstanding debt obligations are assets for creditors and liabilities for debtors.|

| |May or may not be covered by written agreements. |

|debt coverage |See debt service coverage. |

|debt security |Any financial instrument representing a creditor relationship between the issuer (the debtor) and the holder of the |

| |instrument (the creditor). This generally includes all U.S. Treasury securities, municipal securities, corporate bonds, |

| |convertible debt, commercial paper, and securitized debt instruments such as CMOs and REMICs. Debt securities are |

| |usually not defined to include option contracts, futures contracts, forward contracts, lease contracts, or |

| |nonsecuritized loans. |

|debt service |A term used to refer to the amount of principal and interest payments required by a borrower's loans or securities |

| |issued. Also used as a verb to describe making such payments. |

|debt service coverage ratio |A simple comparison of the cash available to make principal and interest payments to the bank or to bond holders with |

| |the amount of those required principal and interest payments. Debt service coverage is expressed as a ratio with the |

| |annual net income divided by the annual debt service requirement. |

|debt service coverage (DSC) |The margin by which all of a borrower’s or bond issuer's required principal payments (not just those for the loan under |

| |consideration or just those for loans to one bank) are exceeded by the sum of the firm's cash flow plus all of the |

| |principal repayments and interest expense deducted in the process of calculating that cash flow. |

|debt sinking fund |See sinking fund. |

|debt tranche |Tranches in a multi-class security that have seniority ranking, for repayment, ahead of equity trances. See |

| |collateralized debt obligation (CDO), equity tranche and waterfall. |

|debt-to-worth ratio |The simplest way to measure leverage. Calculated by dividing total liabilities by total equity. |

|debtor |(1) A party who owes money or other performance to another party. Under the UCC, debtor includes the seller of accounts |

| |or chattel paper. |

| |(2) For the purposes of UCC provisions dealing with collateral, debtor also applies to the owner of collateral given as |

| |security for the debt of another. |

|debtor in possession |In some bankruptcy proceedings, the debtor, rather than a trustee, may continue to operate the business. The debtor in |

| |possession is the same person or company that controlled the business prior to the bankruptcy, however, the debtor in |

| |possession is a different legal entity. |

|decay analysis |Statistical analysis of the rate of attrition. Decay analysis is used to analyze historical volatility of core deposit |

| |volumes, specifically rates for withdrawals and account closures. Deposit decay rates should be calculated by tracking a|

| |representative sample of accounts over a period of time that covers at least one interest rate cycle. Such volatility |

| |studies have been used by banks for many years to determine effective maturity assumptions that are then employed in |

| |present value analysis to calculate core deposit values for deposit purchases, branch acquisitions, and bank |

| |acquisitions. |

|declaration page |The page in an insurance policy that contains all, or almost all, of the policy information specific to that particular |

| |insurance policy. The declaration page typically includes the name of the insured, the identification of the insured |

| |property, the amount of the insurance coverage, the expiration date of the policy, and the name of any lender with an |

| |interest in the insured property. |

|deed in lieu of foreclosure |A deed executed by the mortgagor that transfers ownership in real estate to a lien creditor. This instrument is used |

| |when the debtor is unable or unwilling to pay and wishes to avoid foreclosure. |

|deed of trust |A three-party document conveying interest in property, almost always real estate, to a trustee. In many states, deeds of|

| |trust are used instead of mortgages. In those states, the trustee holds the deed in favor of the lender and then |

| |reconveys the title to the borrower when the loan is paid in full. Sometimes called a trust deed. |

|deep discount |A large discount for a financial instrument. The condition that exists when a financial instrument is trading at a |

| |market price that is well below its par value. May also be used to refer to those securities selling at prices well |

| |below par. |

|deep in the money |A phrase used to describe an option with a high intrinsic value resulting from the fact that the market value of the |

| |underlying instrument is well below (for a call option) or well above (for a put option) the strike price of the option.|

|default |(1) noun — A condition in which a loan or investment is not performing as expected because of the debtor's failure to |

| |act or refrain from acting in ways contractually agreed upon. As in "the loan is in default" or "an event of default." |

| |(2) verb — A debtor's failure to act or refrain from acting in ways contractually agreed upon in the loan documents. |

| |Most often, default is the debtor's failure to pay. |

|default rate |An alternative higher rate of interest or a premium specified in a loan document to be added to the contractual rate of |

| |interest that can be charged by the lender if the borrower is in default. |

|default risk |The risk arising from the chance that debtors will not make promised payments either on time or in full. Also called |

| |credit risk. |

|defeasance |The legal release of a debtor from being the primary obligor under the debt, either by the courts or by the creditor. |

| |Also called legal defeasance. See in-substance defeasance. |

|deferred charges |Costs capitalized as assets on a firm's balance sheet for expenses such as long-term expenses that will not be recovered|

| |in the normal working capital cycle of the business or expenditures that will be charged to future operations. Examples |

| |include costs of rearranging equipment in a factory and capitalized research costs. |

|deferred load |See back-end load. |

|deferred sales charge |See back-end load. |

|deferred tax asset |An asset reflecting a likely reduction in future income taxes. Accounting for deferred tax assets is governed by FAS |

| |109. |

|deferred taxes |A liability account that reflects the accumulated difference between the amount of income tax that the firm shows each |

| |year as an expense on its financial statements and the amount of income tax, usually lower, that the firm pays to the |

| |government. |

|defined benefit plan |A pension or other employee benefit plan that provides specified amounts of benefits to eligible participants. The |

| |specified amounts of benefits are usually determined based upon age, years of service, and/or levels of compensation. |

|defined contribution plan |A pension or other employee benefit plan that provides a specified contribution amount for the benefit of eligible |

| |employees. The participants ultimately receive amounts that depend on both the accumulated contributions and the |

| |investment returns realized from investment of the accumulated contributions. |

|delay days |Lag times. The amount of time before the owner of a MBS receives payments from the underlying mortgages. The time |

| |between when the underlying mortgagors make their payments to the servicers and when those payments are due to the MBS |

| |investors. Delay days may refer to either stated delay or actual delay days. Stated delay days is the number of days |

| |from the issuance of an MBS pool or from the beginning of the interest accrual period until the first payment remitted |

| |to the investors who own the right to receive the cash flow. For example, a GNMA MBS pool with a stated delay of 45 days|

| |would pay interest accrued in January to security holders on February 15. Actual delay days is the monthly lag, measured|

| |in days, between the date the payments are due from a mortgage loan borrower and the date that the pro rata share of |

| |those payments is remitted to the MBS investors who own the right to receive the cash flow. Thus, since the January |

| |payment is not due until February 1, GNMA holders who receive January’s payment on February 15 have 14 actual delay |

| |days. |

|de-leveraged bonds |Bonds that pay interest to investors according to a formula based on a fraction of the increase or decrease in a |

| |specified index. De-leveraged bonds are a type of structured note. |

|delivery and acceptance certificate |A document that evidences the fact that goods have been delivered to a purchaser or lessee and accepted by that |

| |purchaser or lessee. |

|delivery float |The time between when a check is ready for disbursement and when the vendor or employee actually receives it. For |

| |vendors, this may be considered the same as mail float. |

|delivery vs. payment (DVP) |The simultaneous exchange of securities and cash. The safest method of settling either the purchase or sale of a |

| |security. In a DVP settlement, the funds are wired from the buyer's account and the security is delivered from the |

| |seller's account in simultaneous, interdependent wires. |

|delta |(1) The Greek letter used by mathematicians to refer to change or the quantity of change. |

| |(2) The price sensitivity of an option. The change in an option’s price divided by the change in the price of the |

| |underlying instrument. As an option becomes deeper in the money, its delta gets closer to 1.0. As an option get further |

| |out of the money, its delta gets closer to zero. However, the change is nonlinear - the delta changes faster when the |

| |option is close to being in the money. The rate of change in an option’s delta is called the option’s gamma. |

|demand |Term used to describe a creditor's right to request payment in full of a debt. |

|demand deposit |A deposit account that permits the depositor to withdraw funds on demand. Usually, but not always, a checking account. |

| |Sometimes called demand deposit account (DDA). |

|demand note |A promissory note that calls for principal to be payable on demand. In recent years, courts have significantly |

| |restricted the circumstances under which a bank could make and enforce a demand for repayment under a demand note. |

|dematerialized |A term used to describe a physical certificate representing ownership of a security (a stock certificate or a bond) that|

| |is held by a trustee. This is an arrangement through which a physical certificate is held so that all future |

| |transactions can be conducted as if the security were issued as a book-entry security. Ownership and liens are recorded |

| |in the records of the trustee rather than evidenced by physical possession of the certificate. Also called immobilized. |

| |Less often, dematerialized is used to refer to book-entry securities that have never been issued in physical form. |

|denomination |The par value of a bond. |

|Department of Housing and Urban |A department of the U.S. government that promotes private and public housing. FHA and GNMA are agencies within HUD. |

|Development (HUD) | |

|departure provision |A specific provision in the USPAP rules for real estate appraisals. The departure provision states that: "An appraiser |

| |may enter into an agreement to perform an assignment that calls for something less than, or different from, the work |

| |that would otherwise be required by the specific guidelines." An appraisal conducted under the departure provision is |

| |called a limited appraisal. See complete appraisal, limited appraisal, and Uniform Standards of Professional Appraisal |

| |Practice. |

|deposit notes |A form of bank obligation that is similar to a deposit. Deposit notes are typically issued with terms from two to five |

| |years. Like CDs, deposit notes are issued for specified terms at either specified rates or specified rate formulas. |

| |Unlike CDs, deposit notes are sold in a predetermined amount for a predetermined time period. The deposit note terms are|

| |usually described in an offering circular similar to an offering of securities. For investors, the primary difference |

| |between bank CDs and bank deposit notes is the way in which interest is calculated. Like many government agency |

| |securities and corporate bonds, interest rates for deposit notes are typically calculated using accrual methods that |

| |assume a 360-day year comprised of months that all have 30 days. Deposit notes may be rated by a nationally recognized |

| |statistical rating organization (NRSRO). |

|depository bank |A bank used as the point of deposit for cash receipts |

|Depository Trust Company (DTC) |An organization that holds physical certificates for stocks and bonds and issues receipts to owners. Securities held by |

| |DTC are immobilized so that they can be traded on a book-entry basis. |

|depreciation |The amount by which a fixed asset's accounting or book value is periodically reduced to reflect the fact that the |

| |economic value of the asset is steadily reduced by a combination of wear and tear from use, age, and/or obsolescence. |

| |The offsetting entry is depreciation expense. |

|derivatives |(1) Financial instruments whose value depends upon the values of underlying assets, interest rates, currency exchange |

| |rates, or indexes. Various authorities define derivative instruments in broad, inclusive terms or narrow, exclusive |

| |terms. It is a common misconception that all derivatives are high-risk, speculative instruments. Large financial |

| |institutions use derivatives for hedging. Options, futures, swaps, and swaptions are common derivatives used for hedging|

| |purposes. All CMOs are derivatives. There are many derivative instruments, and new ones are developed often. See |

| |underlying. |

| |(2) In FAS 133, FASB defines derivatives narrowly. With some exceptions, FAS 133 defines a derivative instrument to be |

| |any financial instrument or other contract that has all three of the following characteristics: |

| |A. The financial instrument or contract has both: |

| |1. One or more underlyings. |

| |2. One or more notional amounts or payment provisions or both. |

| |B. The financial instrument or contract either does not require an initial investment or requires an initial net |

| |investment that is "smaller than the amount that would be required for other types of contracts that would be expected |

| |to have a similar response to changes in market factors." |

| |C. The terms of the financial instrument or contract either |

| |1. Require or permit net settlement. |

| |2.Provide that the contract can be readily settled net by a means outside the contract. |

| |3.Provide for delivery or an asset that puts the recipient in a position not substantially different from net |

| |settlement. |

| |Mainly as a result of FASB’s second requirement, financial instruments such as CMOs and structured notes that are |

| |commonly called derivatives are not derivatives as defined by FASB. See FAS 133. |

|detail method financing |See dominion of funds. |

|dilution |(1) The difference between gross sales and net sales. Dilution is caused by sales that are reversed as a result of |

| |returns and/or allowances. |

| |(2) The reduction in an existing stockholder’s position that results from the issuance of new shares. |

|dilution rate |Dilution as a percentage of gross sales. |

|dime |An informal name for 10 basis points. |

|direct deposit |A system wherein amounts are transferred from a payor’s checking account to the accounts of payees no matter where they |

| |bank. The transfers are made electronically and do not require a paper check or draft. The key consideration is that the|

| |transaction is accomplished without involving the payee. |

|direct hedges |A form of capital markets or derivatives hedge in which the cash market instrument being hedged is hedged by an options |

| |or futures contract on the same underlying instrument. For example, a 91-day U.S. Treasury bill hedged with a Treasury |

| |bill future. Because traded futures and options contracts have underlying instruments tied to securities, retail banks |

| |do not have much opportunity to use direct hedges to manage the interest rate risk in their loans and deposit |

| |portfolios. The opposite of a direct hedge is a cross hedge. |

|direct lease |A form of lease financing in which the bank acquires property from a supplier and then leases that property directly to |

| |an end user. The bank is the owner and the lessor and the end user is the lessee. |

|direct verification |The audit procedure of mailing the account debtor a note requesting the account debtor to confirm the balance owed. |

|directionally correct |An expression used to indicate that a measurement is accurate to the extent that it shows the quantity to be measured to|

| |be positive or negative even though the degree to which the quantity is positive or negative may be measured |

| |inaccurately. |

|disbursement float |The total time period between when a check is prepared by the remitter and when the check is presented for payment. This|

| |float also includes the delivery float, processing float, and transit float. Disbursement float is the float period for |

| |the remitter. The collection float for the organization that will receive the check is the same duration as the |

| |disbursement float. |

|disbursements |Cash payments. |

|discharge |(1) The action of releasing a lien or the document in which the creditor relinquishes a lien. Also known as a |

| |satisfaction, a release, a reconveyance, or an extinguishment. However, release tends to be used in connection with both|

| |real and personal property, while the discharge, extinguishment, reconveyance, and satisfaction are more often used only|

| |in connection with real property. See partial release and release. |

| |(2) Relief granted to a debtor by a bankruptcy court. Discharge relieves the debtor from all further responsibility for |

| |pre-petition debt covered by the discharge. |

|disclaimer opinion |An opinion letter accompanying audited financial statements in which the CPA states that he or she cannot express an |

| |opinion because of limitations in either the scope of the audit and/or because of uncertainties about the future which |

| |either have an effect that cannot be estimated or which cannot be resolved. |

|discount |The amount by which the price for a security is less than its par or face value. The discount or difference between such|

| |a reduced value purchase price and the redemption (par) value comprises all or part of the investor's compensation for |

| |owning the security. |

|discount rate |(1) The percentage rate applied to the redemption value of a security in order to calculate a reduced value for a |

| |purchaser. Some (or all in the case of zero coupon securities) of the investor’s return comes from the resulting price |

| |discount. |

| |(2) The rate of return for short-term securities for which the investor’s entire compensation comes from the discount |

| |amount. |

| |(3) The rate of interest charged by the Federal Reserve Banks for advances. |

| |(4) An interest rate applied to a single cash flow that will not be paid or received until a future time in order to |

| |calculate the present value of that future cash flow. |

| |(5) An interest rate or a series of interest rates applied to every one of the future cash flows of interest and |

| |principal expected from a financial instrument in order to create a single value for that instrument. This single value |

| |is equivalent to the sum of the present values for each of the separate cash flows expected from the instrument. When |

| |prevailing market rates are used as the discount rate, this technique produces a fair market value that is used as a |

| |proxy for market value when the market value of a financial instrument is not readily available. See fair value. |

|discount securities |(1) Securities that do not pay periodic interest. Investors earn the difference between the discount issue price and the|

| |full face value paid at maturity. Treasury bills, banker’s acceptances, and zero coupon bonds are discount securities. |

| |Most commercial paper is also issued at a discount. See original issue discount. |

| |(2) Any security that is trading at a price less than par or 100. |

|discounted cash flow |A technique or process for valuing a financial instrument by applying a discount rate (or a series of discount rates) to|

| |calculate a present value of each future interest and principal cash flow expected from a financial instrument. The sum |

| |of the market values of the cash flows is considered to be the value of the instrument. For financial instruments with |

| |readily available, current trade prices, this value is called the fair value and is used in lieu of a trade- or |

| |transaction-based market value. |

|disintermediation |(1) The investing of funds that would normally have been placed in a bank or other financial institution (financial |

| |intermediaries) directly into investment instruments issued by the ultimate users of the funds. Investors and borrowers |

| |transact business directly and thereby bypass banks or other financial intermediaries. |

| |(2) The elimination of intermediaries between the first case provides of capital and the ultimate users of capital. |

|dispersion |The distribution pattern of measurements. The standard deviation is the most common measure of dispersion. |

|dividend received deduction (DRD) |Federal tax law allows a C corporation investing in the stock of other corporations to take a tax deduction for the |

| |dividend income received from other corporations. This tax treatment applies to dividends from preferred and convertible|

| |preferred stock in addition to common stock. The deduction is usually, but not always, 70 percent of the dividend amount|

| |received. |

|dividends |(1) Part of a corporation's profits that are distributed to shareholders rather than kept by the corporation in retained|

| |earnings. |

| |(2) The interest expense paid out by mutual financial institutions for deposits and by credit unions for shares. |

|division |An unincorporated subunit of a corporation. |

|DK |Acronym for "Don’t Know." A security is said to be "DK'd" when it is delivered to the purchaser or more typically the |

| |purchaser's correspondent but is rejected because the purchaser either doesn't know or doesn't agree with one or more of|

| |the aspects of the trade. For example, a trade may be DK'd because of an incorrect price, amount, or CUSIP number. |

|documents |A category of personal property defined by Article 9 of the UCC. Documents are written evidence of title such as bills |

| |of lading, warehouse receipts, and dock receipts. To be a document of title, it must be issued by or addressed to a |

| |third party (called a bailee) and cover goods in the bailee's possession. |

|doing business as (d.b.a.) |Designation, usually following a name, indicating that a name used by a business is not the legal name of the entity |

| |doing business but is an assumed name or trade name instead. |

|dollar roll |A short-term funding technique used for mortgage pass-through securities. A seller of a roll agrees to sell a mortgage |

| |security at an agreed-upon price on a specified date and to buy back a similar security at a specified future date. The |

| |seller receives the use of the funds for the specified time period but does not receive the monthly cash flows from the |

| |mortgage security during the roll period. The buyer or counterparty agrees to buy the mortgage security at an |

| |agreed-upon price and to sell back a similar security at a specified future date. The buyer is the owner of the security|

| |for that time period and as the owner is entitled to all of the cash flows during that period. Unlike a repo/reverse |

| |repo transaction, at the end of the transaction time period, the buyer is only required to resell a substantially |

| |similar security to the seller. See drop. |

|dominion of funds |A form of receivable lending in which the bank requires that the borrower give the bank control over the borrower's |

| |accounts receivable collections. Dominion is a legal term meaning control. This form of lending is also called ledgering|

| |or the detail method financing. Do not confuse with factoring. |

|double-barreled bonds |Municipal revenue bonds that are also supported by a second source of repayment. For example, payments of an airport |

| |bond issue may depend primarily upon income generated by the airport. Those funds may then be further backed by a |

| |limited guarantee from the county or city that owns the airport. |

|double leverage |Leverage in bank holding companies that use borrowed funds to finance the holding company's equity investments in its |

| |subsidiaries. |

|downstream funding |The practice of borrowing funds at the bank holding company level. The funds are then lent by the holding company to a |

| |subsidiary. |

|downstream guaranty |A guaranty of a loan to a borrowing entity when the guarantor is a parent company or stockholder of the borrowing |

| |entity. |

|downward sloping yield curve |A yield curve depicting a situation in which yields for shorter-term maturities are higher than those for longer-term |

| |maturities. Downward sloping yield curves are atypical. |

|draft |A written order drawn by one party, called a drawer, that directs a second party (almost always a bank), called a |

| |drawee, to pay a sum of money to a third party, called the payee. For example, a check. Drafts are used with letters of |

| |credit. Drafts may be sight drafts, payable upon receipt, or time drafts, payable on some specified future date. |

|dragnet clause |A provision in a mortgage or security agreement that attempts to extend the security interest granted to the creditor to|

| |cover not only the described debt but also all other present and future indebtedness of the debtor. |

|drawee |The party to whom a check or draft is written. Also called payee. |

|drawor |The party who writes a draft or check against funds he or she owns. Also called payor. |

|DRD |See dividend received deduction. |

|dribble rule |An unofficial name for a provision in Securities and Exchange Commission Rule 144. The dribble rule is a limit on how |

| |much restricted or controlled stock can be sold within a period. |

|driver rate |A market interest rate used in simulation modeling to affect interest rates for other instruments. For example, instead |

| |of forecasting future levels of rates to be paid on its 90 day CDs, a bank modeler may tie those rate changes to future |

| |changes in a market driver rate such as the 90 day T-Bill rate. |

|drop |The difference between the prices in a dollar roll on the two settlement dates. The drop is expressed in 32nds. The drop|

| |is the price that the buyer of the dollar roll pays to the seller for the right to own the mortgage security and receive|

| |its cash flows during the term of the transaction. |

|drop dead agreement |See forbearance agreement. |

|DSC |See debt service coverage. |

|DTC |See Depository Trust Company. |

|dual index notes |Securities with coupon rates that are determined by the difference between two market indexes. These bonds often have a |

| |fixed coupon rate for a brief period followed by a longer period of variable rates. A type of structured note. |

|due bill |An instrument evidencing the obligation of a seller to deliver sold securities to the buyer of those securities. |

|due-on-sale clause |A provision in a mortgage permitting the lender to demand payment in full when the property is sold. |

|duration |A sophisticated measure of the average timing of cash flows from an asset or a liability or from an asset portfolio or a|

| |liability portfolio. Essentially, duration is a more accurate measure of maturity because it reflects the timing of cash|

| |flows from periodic interest and/or principal payments in addition to the cash flows represented by the funds |

| |transferred at maturity. Duration is computed by summing the present values of all of the future cash flows after |

| |multiplying each by the time until receipt, and then dividing that product by the sum of the present value of the future|

| |cash flows without weighting them for the time of receipt. One way to view duration is as the balancing point for a |

| |series of cash flows. One author described it as that "sweet spot" or "balancing point" somewhere between the day a |

| |position is acquired and the day that it matures, where the return remains practically unchanged no matter what happens |

| |to interest rates. See convexity, effective duration, Macaulay duration and modified duration. |

|duration drift |A phrase used to describe the slow but inexorable change in duration that occurs with the passage of time. Measurements |

| |of duration must be regularly recalculated because of duration drift. |

|duration MVPE |The measured interest rate sensitivity of bank equity calculated with the use of duration methodology. The modified |

| |duration of equity. This name is used to distinguish between MVPE rate sensitivity calculated using duration methodology|

| |and the more common VAR calculation using economic value simulation methodology. |

|duration of equity |An application of duration analysis that measures the interest rate sensitivity of the bank as whole. Duration of equity|

| |views the bank's equity as if it were a bond. This "bond" has a stream of obligations for future cash inflows. Those are|

| |the cash flows from the bank's assets. It also has a stream of obligations for future cash outflows. Those are the cash |

| |flows from the bank's liabilities. When the present value weighted average for the asset cash flows is calculated and |

| |reduced by the total of the present value weighted cash flows from the liabilities, then the duration of the equity |

| |"bond" is determined. It is expressed by the formula: duration of equity = duration of assets minus (the duration of |

| |liabilities times (total liabilities divided by total assets)). |

|DVP |See delivery vs. payment. |

|dwarfs |Fifteen-year FNMA MBS pools. |

|dynamic gap |Gap analysis methodologies that include assumed volumes for renewals, rollovers, replacement business, growth, etc., to |

| |reflect the fact that banks do not close their doors and simply honor remaining outstanding obligations as of the date |

| |on which gap reports are prepared. Dynamic gap analysis attempts to reflect the reality that on an ongoing basis loan |

| |payments and maturities are replaced with new loans; deposit withdrawals are replaced by new deposits. The opposite of |

| |static gap analysis. |

E

|early amortization event |A type of credit enhancement used in asset backed securities. One or more triggers, defined in the asset backed |

| |security's documentation require the termination of revolving periods, controlled amortization periods and/or |

| |accumulation periods. Once triggered, the early amortization provision requires that the monthly principal payments be |

| |distributed to investors as they are received. The most common trigger is a measure of how the portfolio yield net of |

| |charge-offs exceeds the base rate of servicing plus the investor coupon rate. Also called a payout event. |

|earnings at risk (EAR) |The quantity by which net income is projected to decline in the event of an adverse change in prevailing interest rates.|

| |One measure of an institution’s exposure to adverse consequences from changes in prevailing interest rates. See value at|

| |risk (VAR) for an alternative measure. |

|earnings credit rate |An interest rate applied to investable account balances to determine how much expense for bank services used by a |

| |depositor is offset by the deposits maintained by that depositor. The same calculation can work in the opposite way by |

| |applying the earnings credit rate to the actual service charges to determine how much deposit balance is needed to pay |

| |for the charges. The earnings credit rate is always expressed as an annual rate even though the calculations are usually|

| |done monthly. Also called earnings allowance rate. |

|earnings retention rate |The percent of current period earnings retained by the firm as opposed to being paid out as dividends or partners’ |

| |withdrawals. The after-tax net income minus dividends then divided by the after-tax net income. Not to be confused with |

| |retained earnings, a name for the quantity on the balance sheet that includes the accumulated total of earnings |

| |retained. |

|EBIT |Acronym for earnings before income taxes. |

|ECOA |See Equal Credit Opportunity Act. Pronounced ee |

|econometric models |Systems of mathematical formulas that attempt to represent the interaction of various macroeconomics variables. Some |

| |economists use these models to predict the alterations that will result from changes in one or more economic conditions.|

| |These models are sometimes used to predict interest rates. Rate forecasts made by econometric models are seldom correct.|

|Economic Development Corporation (EDC) |A special type of corporation established by a community solely to act as a conduit. The EDC can, as a municipal entity,|

| |borrow funds or sell securities that are, in most cases, exempt from federal income tax. Consequently, the EDC can raise|

| |funds at lower interest rates than businesses. The lower-cost funds are used by the EDC to buy fixed assets that are |

| |then leased to the business. The lease rate reflects the EDC’s low cost of capital. The EDC has no responsibility for |

| |the payment of interest and principal on the debt except to pass the business's rent payments through to the investors. |

|economic value added (EVA®) |See shareholder value added (SVA). Since EVA is a registered mark, the phrase shareholder value added, or SVA, is often |

| |used instead. |

|economic value of equity (EVE) |One measure of exposure to interest rate risk. The difference between the sum of the present values of all cash flows |

| |from assets and the sum of the present values of all cash flows from liabilities. This difference is a proxy or estimate|

| |used for capital when the sensitivity of capital to changes in prevailing interest rates is calculated. The rate risk |

| |exposure target focuses on the amount of change in the economic value of equity that might result from a change in |

| |prevailing interest rates. It is a long-term, economic target for measuring rate risk exposure. Previously known by the |

| |less-accurate name market value of portfolio equity or MVPE. Sometimes called net portfolio value (NPV). |

|EDC |See Economic Development Corporation. |

|effective annual yield |A seldom-used expression to refer to the yield on an investment expressed on a compound interest basis. |

|effective date |(1) The date on which funds will be transferred electronically from or to a customer’s account. |

| |(2) The date on which cash flows due under a swap contract begin to accrue. |

|effective duration |(1) One of several methods of expressing duration. More accurate than Macaulay duration or modified duration. See |

| |convexity, duration, Macaulay duration, and modified duration |

| |(2) A synonym for empirical duration. See empirical duration. |

| |(3) A synonym for option-adjusted duration. See option-adjusted duration. |

|effective hedge |See hedge effectiveness. |

|effective interest amortization |A methodology for amortizing premiums or accreting discounts for MBSs that is required by FAS 91. Under this |

| |methodology, premiums are amortized and discounts are accreted into income over the average life of the securities. To |

| |accomplish this, a prepayment speed assumption (PPA) must be made when the MBS is purchased. An average life is then |

| |estimated from that prepayment assumption. Then an initial accretion or amortization schedule is determined to evenly |

| |spread the accretion or amortization into income over the estimated life of the MBS investment. If actual prepayments |

| |received during the life of the investment differ from the assumed speed, as they almost always will, the average life |

| |projection must be revised. When the average life projection is revised, a revised accretion or amortization schedule |

| |must be calculated for the entire period from the purchase date. In practice, many investors do not do this until the |

| |difference between the original speed assumption and a more accurate, current assumption, is material. An alternative |

| |system, level factor amortization, is often considered superior. |

|effective margin |The effective margin is the average spread over the underlying index that the investor expects to earn over the life of |

| |a floating-rate security. For a floating-rate security selling at its par line, the effective margin is identical to the|

| |spread between the coupon rate and the underlying index. An advantage of using an effective margin measurement is that |

| |it applies equally well to floating-rate securities trading at discounts, at par, or at premiums. A security trading at |

| |a discount will have an effective margin greater than the difference between the coupon rate and the index. |

|effective maturity |One description of the tenor of a CMO. The final date at which principal will be repaid based upon the prepayment speed |

| |assumption selected for the calculation. |

|effective range |The spread between specified upper and lower limits for prepayments in a structured CMO such as a PAC. |

|effective yield |A measure of the annual return from an investment. The Effective yield is calculated by dividing the coupon interest |

| |rate by the amount invested expressed as a percentage of the par value. |

|efficient asset or efficient portfolio |An asset or portfolio of assets that earns the maximum possible return for its given level of risk. An asset or a |

| |portfolio of assets is considered to be efficient if no other asset or portfolio of assets offers a higher expected |

| |return with the same (or lower) risk or offers a lower risk with the same (or higher) expected return. This concept is |

| |part of a financial explanation sometimes called the Markowitz Portfolio Model or the Efficient Frontier Theory. The |

| |efficient portfolio is defined mathematically based upon the expected returns, the standard deviation of returns, and |

| |the covariance of returns for the portfolio. |

|EFT |See electronic funds transfer. |

|EITF |See Emerging Issues Task Force. |

|electronic chattel paper |A document that includes both monetary obligation and a security agreement consisting of information stored in an |

| |electronic medium. A category of personal property collateral defined by the 2001 revisions to Article 9 of the UCC. |

|electronic funds transfer (EFT) |An electronically based rather than paper-based system of transferring funds to and from accounts. Two main EFT |

| |remittance methods are wire transfers and automated clearing house (ACH). |

|Electronic Signatures in Global and |A Federal statute that gives electronic signatures the same validity as handwritten signatures on paper documents. |

|National Commerce Act |Actually, it is more accurate to say that under this law online contracts "may" have the same legal status as paper |

| |contracts. The e-sign law does not make electronic contracts enforceable it merely provides that courts cannot deem an |

| |electronic contract to be unenforceable solely because they are in electronic form. Enacted in 2000. Better known as the|

| |"e-sign law". |

|eligible accounts |Receivables that are acceptable to the lender for the purpose of making advances to the borrower under a line of credit |

| |with an advance formula. The criteria for determining the eligibility of accounts must be set forth in the loan |

| |documentation. |

|eligible banker's acceptances |Banker’s acceptances that meet Federal Reserve requirements and thus can serve as collateral for bank borrowings from |

| |the Federal Reserve. The accepting bank can sell eligible BAs without incurring reserve requirements. (When an accepting|

| |bank sells an ineligible BA, the sale is treated as a borrowing subject to reserve requirements.) See banker's |

| |acceptance. |

|eliminations |See intercompany eliminations. |

|embedded derivative instrument |Defined by FASB in FAS 133. An implicit or explicit term in a contract such as a bond, insurance policy, or lease, that |

| |meets the definition of a derivative even though the entire contract may not. Under FAS 133, the certain embedded |

| |derivatives must be separated from the host contract for purposes of reporting and accounting. See embedded option and |

| |FAS 133. |

|embedded option |A provision in a financial contract or financial instrument, such as a loan or a security, that allows one party to |

| |change the timing or amount of one or more cash flows associated with that contract or instrument. An options feature of|

| |minor importance in bank products or debt instruments. Sometimes called a hidden option. They are "hidden" not because |

| |they are in any way secret but because they are not separate, detachable features that banks or customers can add or |

| |subtract to customize individual transactions. Instead, they are one of a number of features, terms, or contract rights |

| |that are embedded in the contract or financial instrument. Examples include prepayment options on loans, early |

| |withdrawal options on certificates of deposit, annual and lifetime rate caps on ARMs, and call options in bonds. |

| |Embedded options make both the projected return and the interest rate risk of a financial instrument difficult to |

| |evaluate because the probability that the option will be exercised must be evaluated, and may vary with movements in |

| |rates. See embedded derivative instrument, option and option risk. |

|Emerging Issues Task Force (EITF) |A unit of the Financial Accounting Foundation that addresses accounting issues not yet addressed by a published FASB |

| |Statement of Financial Accounting Standards. |

|eminent domain |The power of a government to acquire private property for public purposes. It is used frequently to obtain real property|

| |that cannot be purchased from owners in a voluntary transaction. When the power of eminent domain is exercised, owners |

| |normally are compensated by the government in an amount determined by the courts. |

|empirical duration |A measure of duration calculated by "backing into" the duration value using changes in observed market prices resulting |

| |from changes in prevailing rate. |

|empirical VAR |A measure of a financial instrument’s, a portfolio of financial instruments’, or an entity’s exposure to reductions in |

| |value resulting from changes in prevailing interest rates. Also known as simulation VAR, empirical VAR is one of several|

| |different methods for calculating VAR. Empirical or simulation VAR calculates VAR by modeling potential value changes |

| |for a defined time horizon over a large number of possible scenarios. The result of these hundreds or even thousands of |

| |simulations is a distribution of possible outcomes. VAR is then calculated from that distribution. This approach does |

| |the best job of capturing option risk. Unfortunately, it is the most computationally intensive of the three statistical |

| |techniques for calculating VAR. See correlation VAR, historical VAR and value at risk (VAR). |

|Employee Retirement Income Security Act |Legislation mandating standards for vesting requirements and funding of pension plans. |

|of 1974 (ERISA) | |

|end lender |See permanent lender. |

|end point analysis |A determination of the number and value of checks drawn on each transit routing number. |

|end user |A counterparty who intends to own the position. Contrast with a counterparty such as a dealer who intends to sell the |

| |position to an end user. |

|endorsement |A written statement on a document, usually on the back of the document, in which the owner assigns his rights to an |

| |individual or entity named in the endorsement. |

|endorser |Technically, an endorser is anyone who signs the back of a financial instrument. In lending, the term is used as |

| |functional equivalent of a guarantor. A loan endorser usually signs a guaranty agreement included on the promissory note|

| |form, often on the back. |

|endowment |Funds or property that are donated with either a temporary or permanent restriction as to the use of principal. |

|enterprise fund |(1) A fund established to account for government operations financed and operated in a manner similar to private |

| |business enterprises (e.g., water, gas, and electric utilities; airports; parking garages; or transit systems). In this |

| |case the governing body intends that costs (i.e., expenses, including depreciation) of providing goods or services to |

| |the general public on a continuing basis be refinanced or recovered primarily through user charges. |

| |(2) A fund established because the governing body has decided that periodic determination of revenue earned, expenses |

| |incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, |

| |or other purposes. |

|enterprise-wide risk management (ERM) |An integrated approach to measuring and managing risks within a financial institution. ERM, as opposed to traditional |

| |separate, "silo" based, risk analysis, recognizes that risks are inter-related and often have common drivers. For |

| |example, the macroeconomic conditions related to high interest rates impact credit risk in addition to interest rate |

| |risk. Moves to ERM are partially driven by the Basel II capital guidelines and related rules issued by national banking |

| |regulators. |

|Equal Credit Opportunity Act (ECOA) |A Federal statute that makes it illegal for creditors to discriminate in any aspect of a credit transaction on the basis|

| |of sex, marital status, age, race, national origin, color, religion, receipt of public assistance, or the exercise of |

| |rights under the Consumer Protection Act. The Federal Reserve Board of Governors has adopted Regulation B to implement |

| |this statute. |

|equipment |A category of goods defined by Article 9 of the UCC. Equipment is goods used primarily in the operation of a business. |

| |It includes professional equipment and farm equipment. Any personal property that is tangible and is not consumer goods,|

| |farm products, or inventory. |

|equipment trust certificates |A common type of secured corporate bond. For these bonds, a collateral interest in equipment or machinery provides extra|

| |protection for bond holders. In most cases, the equipment that is pledged to secure the bonds is equipment or machinery |

| |that is purchased from the proceeds of the bond issue. Typically, a trustee will purchase the equipment, issue the |

| |bonds, and lease the equipment to the end user. The end user's lease payments to the trustee are passed to the bond |

| |holders in the form of interest and principal. When the bonds are retired, the end user acquires title to the equipment.|

| |Airlines, railroads, and shipping companies are the most common issuers. |

|equitable subordination |A legal term used in bankruptcy to describe a process in which a bankruptcy judge decides that fairness can only be |

| |achieved by giving lower priority (subordinating) the claims of one or more creditors (usually a secured bank) to the |

| |claims of other (usually unsecured) creditors. |

|equity method |An accounting method used to reflect an investor's interest in a company. This method is used when the investor owns 20 |

| |percent or more of the investee and has significant influence over the investee. Under the equity method, the investment|

| |is originally recorded on the books of the investor at its cost. Subsequently, the asset value of that investment on the|

| |investor's financial statements is increased or decreased by the investor's proportionate share of the increase or |

| |decrease in the investee's net worth. |

|equity security |Any security representing an ownership interest in the issuing entity. This includes common, preferred, or other capital|

| |stock. It also includes mutual funds and contractual rights to acquire or dispose of ownership interests at fixed or |

| |determinable prices such as warrants, rights, call options, and put options. Does not include convertible debt. |

|equity tranche |One name for the lowest quality (highest credit risk) tranche in a CDO structure. Sometimes called junior subordinated |

| |notes, preferred stock or income notes. The contractual rules for the cash flow distributions in a CDO structure enable |

| |the senior tranches to receive high credit ratings by shifting risk to the equity tranche. See collateralized debt |

| |obligation and waterfall. |

|equity value at risk (EVAR) |A less-commonly used synonym for value at risk. The quantity by which the assumed market value, or portfolio value, of |

| |an institution’s equity is projected to decline in the event of an adverse change in prevailing interest rates. One |

| |measure of an institution’s exposure to adverse consequences from changes in prevailing interest rates. See earnings at |

| |risk for an alternative measure. |

|equivalent bond yield |See bond equivalent yield. |

|ERM |See enterprise-wide risk management. |

|escrow accounts |Cash held in abeyance until an event occurs or does not occur. For example, funds paid monthly by a mortgagor to the |

| |mortgagee are held in escrow until they are due to the taxing authority. |

|e-sign law |See Electronic Signatures in Global and National Commerce Act. |

|estoppel |A legal term describing the preclusion of a party from alleging in a legal action anything that is contrary to previous |

| |actions or admissions of that party. See estoppel letter or estoppel certificate. |

|estoppel letter or estoppel certificate |A document used in commercial mortgage transactions where the lender is secured by property that is leased to tenants. |

| |Also known as tenant estoppel letters or tenant acceptance letters. Written admissions that are obtained by the lender |

| |prior to funding to create estoppel. In an estoppel letter, the tenants attest that they believe the lease to be valid |

| |and enforceable, that they are making lease payments as agreed, that the landlord is not in default of any lease |

| |provisions requiring landlord performance and that no rent has been prepaid. The estoppel letter gives the lender more |

| |rights and more flexibility for disposing of the property in the event that the borrower defaults. See estoppel. |

|Eurodollar CDs |One type of Eurodollar deposit. The certificates are more liquid than the time deposits and therefore trade at lower |

| |yields/higher prices. |

|Eurodollar deposits |Bank deposits denominated in U.S. dollars but held at locations outside of the U.S. Initially, the term only referred to|

| |dollar deposits in London; later it became applicable to dollar deposits anywhere in Europe or the Caribbean; now it |

| |often refers to dollar deposits at any offshore location. The deposits may be held by the foreign branches of U.S. banks|

| |or by non-U.S. banks. Eurodollar deposits may be Eurodollar certificates of deposit or simply Eurodollar time deposits. |

|European option |An option that the holder can exercise only on the expiration date. See American option, Bermuda option and Asian |

|European-style option |option. |

|evaluation |The act or process of estimating the market value of real estate when a transaction secured by real estate falls within |

| |one or more of the exemptions set forth to the requirements for obtaining a full appraisal. If a transaction falls under|

| |one of three exemptions, an evaluation is required. If the transaction is exempted under one or more exemptions not |

| |including one of the three that require an evaluation, an evaluation may still conducted if the lender considers it |

| |prudent. An evaluation may be conducted by independent bank personnel or by an appraiser. When an appraiser conducts |

| |such an estimate of value, it is called a limited appraisal and must meet requirements for limited appraisals. See |

| |limited appraisal and Uniform Standards of Professional Appraisal Practice (USPAP). |

|EVA® |See shareholder value added (SVA). Since EVA is a registered mark, the phrase shareholder value added, or SVA, is often |

| |used instead. |

|EVAR |See equity value at risk. |

|EVE |See economic value of equity. |

|event of default |An event described in a promissory note, security agreement, or loan agreement that triggers rights of the lender to |

| |take remedies set forth in the documents. The most common event of default is the debtor’s failure to make required |

| |interest and/or principal payments to the bank when they are due. Often, the remedy permitted to the bank when an event |

| |of default occurs is the right to declare the debt to be due and payable in its entirety. Formal loan agreements |

| |frequently include numerous events of default. |

|event risk |The risk of an unexpected, future decrease in credit quality that is a result of events such as a corporate acquisition |

| |or material changes in taxes, laws, or regulations. |

|excess servicing |A term used in asset backed securities to describe the amount by which the yield from the loan collateral, net of |

|excess spread |charge-offs, exceeds the sum of the servicing fee and the interest paid to holders of the security. |

|exchange traded |An expression used to refer to financial instruments that are purchased and sold in securities exchanges such as the |

| |Chicago Board of Trade. It excludes instruments that are actively traded in over-the-counter (OTC) capital markets. |

|exchange-traded derivative contracts |Some derivatives are traded on organized exchanges. These derivatives usually have margin requirements. Common |

| |exchange-traded derivatives include futures and options. Other derivatives, such as swaps, are not exchange traded but |

| |are traded in over-the-counter (OTC) capital markets. |

|exercise |The implementation or use of a contractual right, for example, a call option holder’s purchase of the underlying |

| |security. |

|exercise price |The price at which an option may be used. The price at which the owner of the option has the right to buy or sell |

| |whatever the option contract is for. Sometimes called the strike price. |

|expectations hypothesis |The theory that the shape of yield curves is determined by investors' collective expectations of future interest rates. |

| |See implied forward rates. Also see liquidity preference for a modification of this interest rate theory. |

|expected loss or expected risk |The portion or component of risk or loss that is predicted by statistical analysis. |

|expenditures |Decreases in net financial resources. Expenditures include current operating expenses requiring the present or future |

| |use of net current assets, debt service, and capital outlays, intergovernmental grants, entitlements, and shared |

| |revenue. |

|expenses |Outflows or other reductions of assets or increases in liabilities (or a combination of both) from delivering or |

| |producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or |

| |central operations. |

|expiration date |The final date on which an option may be used. See American option and European option. |

|extension risk |The risk that rising interest rates may slow prepayment speeds and therefore cause an investment in a pass-through or |

| |CMO MBS to last longer than the investor anticipated. By taking longer to return the investor's principal, the extension|

| |of the MBS prevents the investor from taking advantage of higher rates available from other investments. |

|external liquidity risk |A term defined by the Federal Reserve. The risk that a bank will experience funding problems as a result of factors |

| |outside of its direct control. The Federal Reserve defines three types of external liquidity risk. These are geographic |

| |(such as the premiums required on deposits at many Texas banks in the late 1980s), systemic (such as the adverse effects|

| |upon several large banks caused by the near failure of Continental Illinois Bank in 1984), or instrument-specific (such |

| |as the collapse of the perpetual floating-rate note market in 1986.) See bank-specific liquidity risk and systemic |

| |liquidity risk. |

|extinguishment |See discharge. |

|extraordinary items |Accounting income, gains, expenses, or losses resulting from transactions or events that are both unusual in their |

| |nature and infrequent in their occurrence. The GAAP requirements for defining something as extraordinary are strict. The|

| |exact language, found in APB Opinion No. 30, paragraph 20, states in order for extraordinary items to be considered |

| |unusual... "the underlying event or transaction should possess a high degree of abnormality and be of a type clearly |

| |unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account |

| |the environment in which the entity operates ....". Thus the same transactions or events can be extraordinary for one |

| |firm but ordinary for another firm. When extraordinary items are reported, they are shown on the income statement net of|

| |applicable income taxes. |

F

|face or face value |See current face and original face. |

|facsimile |An exact copy of something, such as a signature. |

|factor |(1) The percent of the original face of an MBS pool that remains outstanding at any given time is called the current |

| |factor. Principal payments, made by the borrowers, reduce the original face every month. Thus there is a new current |

| |factor each month. The current face is always equal to the product of the original face times the current factor. |

| |(2) An individual or firm that purchases accounts receivable from firms in need of working capital. Usually, a |

| |specialized financial firm engaged exclusively or almost exclusively in factoring. |

|factoring |Providing working capital to businesses by buying their receivables (usually at a discount) rather than lending against |

| |them. Factoring is not lending; it is an outright purchase of the receivable assets, usually on a nonrecourse basis. |

|fail |The event of a securities purchase or sale transaction not settling as intended by the parties. |

|Fair and Accurate Transactions Act (FACT|Consumer protection legislation enacted in 2003. The FACT Act, permanently established the Fair Credit Reporting Act's |

|Act) |federal pre-emption to those areas typically governed by the Fair Credit Reporting Act. Other portions of FACT Act also |

| |amended the Fair Credit Reporting Act to provide consumers with a free annual credit report, new identification |

| |protections, medical privacy rights and restrictions and the ability to opt out of information sharing among affiliated |

| |companies for marketing and solicitation purposes. Section 112 provides a fraud alert system for identity theft victims |

| |and consumers that are on active duty in the military. Section 212 requires lending institutions to provide home loan |

| |applicants with a copy of their credit score that was obtained from a consumer credit reporting agency. Section 311 |

| |imposes a requirement on lenders to provide additional disclosures when risk based pricing affects the rate provided to |

| |the borrower. |

|Fair Credit Reporting Act (FCRA) |Consumer protection legislation enacted in 1968 as part of the Consumer Credit Protection Act to ensure that the banking|

| |system in the United States would have a reliable credit reporting system. The stated purpose of the Fair Credit |

| |Reporting Act was to require that consumer reporting agencies adopt reasonable procedures to meet the needs of commerce |

| |for consumer credit, personnel, insurance, and other information that was fair and equitable to the consumer with |

| |respect to the confidentiality, accuracy, relevancy and proper utilization of such information. One of the most |

| |prominent requirements of the Act was to establish the permissible purposes of the information contained in a consumer |

| |report. |

| |In 2003 Congress updated the Fair Credit Reporting Act when it passed the Fair and Accurate Transactions Act, FACT Act. |

| |FACT made significant changes and expansions to the Fair Credit Reporting Act. See Fair Credit Reporting Act. |

|fair value |An accounting term defined by FASB. The amount at which an asset could be bought or sold in a current transaction |

| |between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are|

| |the best evidence of fair value and should be used as the basis for the measurement, if available. If a quoted market |

| |price is available, the fair value is the product of the number of trading units times that market price. If a quoted |

| |market price is not available, the estimate of fair value should be based on the best information available in the |

| |circumstances. The estimate of fair value should consider prices for similar assets and the results of valuation |

| |techniques to the extent available in the circumstances. Examples of valuation techniques include the present value of |

| |estimated expected future cash flows using a discount rate commensurate with the risks involved, option-pricing models, |

| |matrix pricing, option-adjusted spread models, and fundamental analysis. Valuation techniques for measuring assets |

| |should be consistent with the objective of measuring fair value. Those techniques should incorporate assumptions that |

| |market participants would use in their estimates of values, including assumptions about interest rates, default, |

| |prepayment, and volatility. (Note that the FASB definition in FAS 115 is replaced by the definition in FAS 133. |

|fair value hedge |A type of hedge defined by FAS 133. An entity may designate a derivative instrument as hedging the exposure to changes |

| |in the fair value of an asset or a liability, or a portion of an asset or a liability. Certain requirements must be met |

| |to qualify for fair value hedge accounting. Changes in the fair market value of the derivative instrument in qualifying |

| |fair value hedges are recorded and reported in earnings. At the same time, gains or losses associated with the hedged |

| |risk are also recognized in current earnings. The carrying value (book value) of hedged asset/liability must be adjusted|

| |commensurately with resulting basis adjustment, producing a prospective yield adjustment thus offsetting the related |

| |derivative loss/gain in the same accounting period. See FAS 133. |

|Fannie Mae |An informal name for the Federal National Mortgage Association (FNMA) or for securities issued by it. |

|farm products |A category of goods defined by Article 9 of the UCC. Farm products are crops, livestock, or supplies used or produced in|

| |farming operations. In addition, this category includes products of crops or livestock (such as milk and eggs or other |

| |things in the possession of a farmer) in their unprocessed state. |

|FAS 80 |An accounting rule formerly applicable to futures contracts. See FAS 133. |

|FAS 87 |Financial Accounting Standard No. 87. A rule promulgated by the AICPA that requires firms to report prepaid pension |

| |assets or accrued pension liabilities on their balance sheets. It also requires that financial statement footnotes |

| |disclose a "statement of funded status" and a "reconciliation of funded status" for those plans. |

|FAS 95 |Financial Accounting Standard No. 95, Statement of Cash Flows. A rule promulgated by the AICPA that requires all audited|

| |financial statements to include a statement of cash flows in the audited reports. Under FAS 95 rules, firms may elect to|

| |prepare the required statement of cash flows using either the direct or the indirect method defined in the rule. |

|FAS 105 |An accounting rule that previously required disclosures of information about financial derivatives. Superseded by FAS |

| |133. |

|FAS 106 |Financial Accounting Standard No. 106, Employers' Accounting for Post Retirement Benefits Other Than Pensions. A rule |

| |promulgated by the AICPA . that requires firms to accrue postretirement benefit costs during the periods of the active |

| |service of the covered employees. |

|FAS 107 |Financial Accounting Standard No. 107, Disclosures About Fair Value of Financial Instruments. A rule promulgated by the |

| |AICPA that requires mark- to-market value disclosure of financial instruments. These disclosures are made in footnotes |

| |to published financial statements. FAS 133 amended FAS 107 to include the disclosure provisions about concentrations of |

| |credit risk that were formerly in FAS 105. |

|FAS 109 |Financial Accounting Standard No. 109, Accounting for Income Taxes. A rule promulgated by the AICPA that requires the |

| |recognition of unrealized income tax benefits as deferred tax assets on a firm’s balance sheet. Also provides for the |

| |establishment of a valuation reserve to offset some or all of the deferred tax assets when the tax benefits are not |

| |likely to be realized. |

|FAS 115 |Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities. A rule |

| |promulgated by the AICPA that requires different accounting treatment for unrealized gains and losses incurred for |

| |securities held in portfolios. Unrealized gains and losses from trading account securities must be reflected in reported|

| |earnings. Unrealized gains and losses from securities deemed available for sale must be netted to a single number that |

| |is shown as a component of shareholders’ equity until realized. Gains and losses for securities deemed to be held to |

| |maturity are not reflected in either the income statements or balance sheets of the holders. |

|FAS 119 |An accounting rule that used to govern disclosures of financial derivatives. Superseded by FAS 133. |

|FAS 130 |Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income. A rule promulgated by the AICPA that|

| |creates new procedures for reporting certain changes in selected financial assets and liabilities. Under FAS 130, these |

| |changes are not reflected in the traditional income statement. See other comprehensive income. |

|FAS 133 |Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities. A rule|

| |promulgated by the AICPA that establishes accounting and reporting standards for derivative instruments. The scope of |

| |the rule includes some derivative features embedded in other contracts. The rule establishes specific accounting and |

| |reporting requirements for derivatives used for each of two kinds of hedging activities - fair value hedges and cash |

| |flow hedges. This rule supersedes FAS 80, FAS 105, and FAS 119. See cash flow hedge, comprehensive income, embedded |

| |option and fair value hedge. |

|FAS 138 |Statement of Financial Accounting Standard No. 138, Accounting for Certain Derivative Instruments Certain Hedging |

| |Activities A rule promulgated by the Financial Accounting Standards Board (FASB) that makes major changes to FAS 133. |

|FAS 149 |Statement of Financial Accounting Standard No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging |

| |Activities A rule promulgated by the Financial Accounting Standards Board (FASB) that makes major changes to FAS 133. |

|FASB |See Financial Accounting Standards Board. |

|fast pools or fast pay |An informal name for MBS pools that prepay rapidly. |

|fat tail |Informal descriptive term used to describe the portions of a probability distribution that have a larger than normal |

| |number of values that are far from the mean. The formal name is kurtosis. |

|FBAR |Report of Foreign Bank and Financial Accounts. Each United States person who has a financial interest in, or signature |

| |authority over, any financial accounts including bank, securities or other types of financial accounts, in a foreign |

| |country must report that relationship by filing an FBAR if the aggregate value of these financial accounts exceeds |

| |$10,000 at any time during the calendar year. The deadline to file the FBAR with the Department of the Treasury for each|

| |calendar year is on or before June 30th of the following year. The term "United States person" means a citizen or |

| |resident of the United States, domestic partnership, domestic corporation, or a domestic estate or trust. |

|FDICA 305 |See Federal Deposit Insurance Corporation Improvement Act 305. |

|Federal Deposit Insurance Corporation |A section in the FDICIA that requires the FDIC, the Office of the Comptroller of Currency (OCC), Office of Thrift |

|Improvement Act (FDICIA) 305 |Supervision (OTS), and the Federal Reserve to add an interest rate risk component to bank and thrift capital |

| |requirements. |

|fed float |The time lag between when the proceeds of a check are available to a bank according to the availability schedule and |

| |when the check is actually presented for payment (clears against the payer’s bank). The fed float represents the |

| |difference between available and collected balances. |

|fed funds |See federal funds. |

|Fed wire |An informal name for the Federal Reserve Communications System. This is the electronic communication network |

| |interconnecting Federal Reserve offices, the Federal Reserve Board, member banks, the U.S. Treasury, and other |

| |government agencies. The Fed wire is used for transferring member bank reserve account balances and government |

| |securities, as well as for transmitting information from the Federal Reserve System. See Clearing House Interbank |

| |Payment System (CHIPS) and Society for Worldwide Interbank Financial Telecommunication (SWIFT). |

|Federal Emergency Management Agency |See flood insurance. |

|(FEMA) | |

|Federal Financial Institutions |A body comprising representatives from all of the federal banking regulatory organizations (the Federal Reserve System, |

|Examination Council (FFIEC) |the FDIC, the OCC, the OTS, and the National Credit Union Administration). The FFIEC issues policy statements but has no|

| |power to mandate any actions. Its policy decisions must be approved by its member organizations. |

|federal funds |Short-term investments/borrowings between banks, usually called fed funds. The investing/lending bank refers to the |

| |transaction as fed funds sold while the borrowing bank refers to the transaction as fed funds purchased. Despite its |

| |name, these transactions are not loans to or from the federal government. Nor do they include any guarantee or backing |

| |from the federal government. They are only called federal funds because the parties exchange the funds by transferring |

| |balances from the lender's account with its Federal Reserve District Bank to the borrower's account with its Federal |

| |Reserve District Bank. Fed funds investments are usually overnight loans. See term fed funds. |

|federal funds rate |The rate for which overnight federal funds are traded. |

|Federal Home Loan Bank System (FHLB) |A U.S. government-sponsored enterprise. Twelve district banks and a Federal Housing Finance Board created by the U.S. |

| |government and owned by member financial institutions. The main purpose of the system is to provide loans to members for|

| |the accommodation of home lending. |

|Federal Home Loan Mortgage Corporation |A U.S. government-sponsored enterprise. FHLMC is owned by member financial institutions and is not an agency of the U.S.|

|(FHLMC) |government. It provides financial products and services in the mortgage market that enhance liquidity. Informally but |

| |widely known as Freddie Mac. |

|Federal Housing Administration (FHA) |An agency within the Department of Housing and Urban Development (HUD) that provides insurance for single-family and |

| |multifamily residential mortgages. |

|Federal National Mortgage Association |A U.S. government sponsored enterprise. FNMA is a private corporation created by the U.S. government to facilitate |

|(FNMA) |financing for housing. Informally but widely known as Fannie Mae. |

|fee appraiser |An individual qualified under federal rules to perform real estate appraisals. Unlike a staff appraiser, a fee appraiser|

| |is not employed by the financial institution contemplating the extension of credit to be secured by the property to be |

| |appraised. |

|fee trading |See adjusted trading. |

|FEMA |Federal Emergency Management Agency. See flood insurance. |

|FFIEC |See Federal Financial Institutions Examination Council. |

|FHA |See Federal Housing Administration. |

|FHA experience |A statistical publication of the FHA that shows the proportion of FHA-insured and VA mortgage loans that terminate each |

| |year. Mortgage loan mortality tables. |

|FHLB |See Federal Home Loan Bank System. |

|FHLB advances |Loans granted to member financial institutions by Federal Home Loan Banks. FHLB advances are structured to meet a wide |

| |variety of borrower needs. Common structures include bullet advances, puttable advances, and principal reducing credit |

| |advances. |

|FHLMC |See Federal Home Loan Mortgage Corporation. |

|fictitious name |A name used by a proprietorship, partnership, or corporation to conduct business that is different from the legal name |

| |of the proprietorship, partnership, or corporation. |

|fidelity bond or fidelity insurance |Insurance protecting an employer from losses resulting from the deliberate misappropriation of the firm’s assets by one |

| |or more of its employees. Fidelity insurance is obtained by most financial institutions. |

|field audits |Any on-site inspection of the bank's collateral may be referred to as a field audit. However the phrase is most often |

| |used to refer to on-site audits of a borrower's records related to sales, accounts receivable, accounts payable, |

| |customer records, and shipping documents. Field audits are often conducted by specially trained bank employees but may |

| |be done by internal bank auditors, external accounting firms hired by the bank, or firms specializing in this service. |

| |Written field audit reports contain significant information for secured lenders. |

|field warehousing |A method of financing inventories in which the inventory is held in custody for the lender by an agent of the lender at |

| |the borrower's place of business. |

|FIFO |See first in, first out. |

|final distribution date |The latest possible date on which an MBS holder receives payment. Because mortgage loans tend to be repaid sooner than |

| |their contractual maturity dates, the actual final payment is likely to occur earlier than the final distribution date. |

|final maturity |The maturity date of the single loan in a pool of mortgage loans that has the maturity date furthest in the future. |

| |Because mortgage loans tend to be repaid sooner than their contractual maturity dates, the actual final payment is |

| |likely to occur earlier than the final maturity date. |

|finance lease |A term used in UCC Article 2A. A lease in which the lessor is not the supplier or manufacturer of the leased goods. In a|

| |finance lease, the lessor must not have any involvement in the selection of the leased goods and it must be serving only|

| |as a conduit for the lessee to obtain the goods. Finally, the lessor must acquire the goods or the right to possess the |

| |goods in connection with the lease. |

|Financial Accounting Standards Board |An accounting industry organization; part of the Financial Accounting Foundation. FASB issues Statements of Financial |

|(FASB) |Accounting Standards that define and govern GAAP for nongovernment entities in the United States. FASB also publishes |

| |Interpretations and Technical Bulletins that govern the application of their accounting standards. |

|Financial Institutions Reform, Recovery,|A federal law enacted in 1989. FIRREA primarily addresses the operation of savings and loan associations; however, it |

|and Enforcement Act (FIRREA) |includes a number of important provisions affecting commercial banks. Arguably the most important FIRREA provisions |

| |affecting banks are those that address requirements for real estate appraisals. |

|financial instrument |Cash, evidence of ownership in an entity (e.g., stock), a contract that creates a right or obligation to receive or |

| |deliver cash (e.g., notes and bonds), or a contract that creates a right or obligation to receive or deliver another |

| |financial instrument or commodity (e.g., options and futures). |

|financial intermediary |A party such as a bank or other financial institution that accepts funds from a provider and places those funds with a |

| |user. The intermediary's investment from the user is usually for a longer term, usually has less liquidity, and usually |

| |has more credit risk than the intermediary's liability to the provider. |

|financial statements |Collective name for historical financial reports of assets, liabilities, capital, income, and expense. |

|financing statements |Forms, usually standard UCC-1 forms, that are required by Article 9 of the UCC to be recorded in a designated public |

| |location in order to perfect a creditor’s lien in personal property collateral. The financing statement is used as a |

| |vehicle for a public recording that establishes lien priority — it does not normally constitute the actual agreement |

| |between the secured party and the debtor. For that reason, the financing statement by itself does not create a security |

| |interest and must therefore be supported by a separate security agreement or pledge agreement. |

|firm commitment |An agreement with an unrelated party that is binding on both parties and that is usually legally enforceable. In FAS |

| |133, FASB specifies that the following are both satisfied for a firm commitment: a) The agreement specifies all |

| |significant terms, including the quantity to be exchanged, the price at which the quantity will be exchanged, and the |

| |timing of the transaction. b) The agreement includes a disincentive for nonperformance that is sufficiently large to |

| |make performance probable. |

|FIRREA |See Financial Institutions Reform, Recovery, and Enforcement Act. |

|first in, first out |A method of accounting for business inventory permitted by GAAP. |

|fixed-period ARM |MBSs that are fixed-rate instruments for an initial period and floating-rate securities thereafter. The initial, |

| |fixed-rate period may be 3, 5, 7, or 10 years. After the expiration of the fixed-rate period, a typical fixed-period ARM|

| |may adjust annually at a margin over the one-year Treasury index. Some fixed-period ARMs have rates tied to LIBOR. |

|fixtures |Fixtures are items that become attached to real property. Examples are heating and air conditioning systems, |

| |wall-mounted shelving, and security alarm systems. Lenders must be extremely cautious about what constitutes a fixture. |

| |As a general rule, an item may be considered goods before it becomes attached to a building, but becomes a fixture after|

| |it is attached. Once affixed to real property, goods may be subject to laws governing real estate collateral rather than|

| |rules under Article 9 of the UCC. |

|flat yield curve |See yield curve slope. |

|flex repo |A term repo/reverse transaction that allows for the investor to sell some of the collateral securities back to the |

| |borrower before the final maturity date of the transaction. Flex repos are well suited to construction projects for |

| |which bond proceeds need to be invested until payment is due for each stage of construction. Usually, the timing of the |

| |loan payments is subject to considerable uncertainty. The flex repo investment has a draw-down schedule for reducing the|

| |size of the investment; however, the investor is not required to adhere to it rigidly. In return for the added |

| |flexibility, investors in flex repos almost always receive slightly lower rates of return than investors in repos with |

| |terms that are more traditional. |

|flight to quality |The situation in which many investors sell or reduce purchases of less creditworthy investments and simultaneously buy |

| |or increase purchases of the most creditworthy investments. Flights to quality often occur suddenly after a major |

| |unexpected default or a major political event. |

|float |The use of funds generated as a result of timing differences in the check-clearing system. For banks, float occurs |

| |because debits given by the Federal Reserve to a bank's reserve account for checks being cleared can be received prior |

| |to the time that the bank allows the customer who presented the check to use the funds. For depositors, float occurs |

| |because credits may be given for checks deposited or tendered for payment before the depositor's accounts are debited. |

| |See bank float, check-clearing float, collection float, delivery float, disbursement float, fed float and processing |

| |float. |

|float analysis |An analysis of an organization’s disbursements to determine the approximate number of days between issuance of a check |

| |and presentation of the check for payment at the organization’s bank. |

|floater |An informal name for a security with a variable coupon rate. Particularly used to refer to floating-rate CMO tranches. |

|floating lien |The name for and the nature of a creditor's interest in a debtor's accounts receivable and inventory. In the natural |

| |operation of any business, the specific receivables and inventory owned at one point in time are replaced over time by |

| |new receivables and new inventory. Thus a creditor’s security interest in accounts receivable and inventory floats from |

| |the specific accounts and inventory held today to that held next week, next month, and thereafter. |

|floating-rate note (FRN) |A medium-term instrument with a coupon rate that floats up or down based upon changes to an index or reference rate. |

| |Often, FRNs are tied to LIBOR. |

|flood hazard zone |A geographic area officially designated under Federal law as an area that might experience damage from flooding. Under |

| |the National Flood Insurance Reform Act of 1994, lenders taking an interest in real property are required to complete a |

| |standard flood hazard determination form developed by the Federal Emergency Management Agency (FEMA). Flood hazard forms|

| |must be retained in the lender’s records. If the form indicates that the property is in a designated flood hazard zone, |

| |the lender is required to have flood insurance protection. Lenders may also have notice requirement obligations for |

| |collateral located in flood hazard zones. |

|flood insurance |Insurance protection against damage caused by floods. For applicable parcels of real estate, lenders with a security |

| |interest in that real estate are required by law to either require that borrowers obtain flood insurance or to obtain |

| |flood insurance for their borrowers. See flood hazard zone. |

|floor |A lower limit for a variable, such as the lower limit on an interest rate paid or received in a transaction. For |

| |example, an adjustable-rate loan may have a floor of 5 percent. In that example, the rate can adjust however loan terms |

| |provide, but it can never fall below 5 percent. The term "floor" is often used with its converse, a cap. A floor may be |

| |an embedded option, such as the floor on the rate for a floating-rate loan, or a stand-alone option contract. |

|floor planning |A form of inventory financing involving loans or advances for specific items of inventory. |

|floortion |An option that grants the holder the right to purchase a floor. |

|flower bonds |U.S. Treasury bonds that can be applied at par toward the payment of U.S. inheritance taxes. The Treasury stopped |

| |issuing flower bonds in 1977. The last flower bond matured in 1998. |

|flux |A measure of the sensitivity of CMO cash flows to changes in the prepayment rate of the underlying MBS collateral. |

| |Derived from flow uncertainty index. Developed by the National Association of Insurance Commissioners to create a |

| |standard measure of CMO volatility. A flux score is a composite of two elements that indicate the impact of six |

| |prepayment scenarios on a bond’s present value and on the timing of its cash flows. That impact is expressed in terms of|

| |variation from a base case. Flux scores are calculated once each year in January. A flux score of 0 indicates no cash |

| |flow uncertainty. (Rather than a lack of interest rate risk, this score indicates that the amount and timing of the cash|

| |flows are known.) There is no upper limit for flux scores. |

|FNMA |See Federal National Mortgage Association. |

|Food Security Act of 1985 |A Federal law that preempts state laws including the UCC as they apply to farm products. The law allows certain buyers |

| |to obtain clear title to farm products regardless of security interests that the seller previously granted to secured |

| |lenders. |

|forbearance agreement |An agreement between a creditor and a debtor. A forbearance agreement is utilized when a debtor has defaulted or is |

| |likely to default. Under the terms of the forbearance agreement, the debtor is given more time to make loan payments, a |

| |reduction in the amount of loan payments due each month or both. Typically, the lender agrees not to exercise rights to |

| |foreclose or accelerate during the forbearance period. In return, the debtor agrees not to contest any actions taken by |

| |the creditor to collect the debt in the event that the debtor fails to comply with the payment schedule or other terms |

| |specified in the forbearance agreement. In some forbearance agreements, the debtor may grant the creditor a deed in lieu|

| |of foreclosure if the terms of the forbearance agreement are not met. Sometimes called a drop dead agreement. |

|forced placed insurance |Insurance purchased by a creditor covering personal or real property owned by debtor. In some cases, forced placed flood|

| |insurance is required by law. In other cases, creditors are granted the right to force place insurance by provisions in |

| |loan agreements, security agreements, and/or mortgages. Forced placed insurance is almost exclusively purchased when the|

| |debtor refuses to obtain or renew required insurance coverage. |

|forecasted transaction |An accounting term defined by FASB in FAS 133. A transaction that is expected to occur but for which there is no firm |

| |commitment. Because no transaction or event has yet occurred and because the transaction or event, when it occurs, will |

| |be at the current prevailing market price, a forecasted transaction does not give an entity any present rights to future|

| |benefits or a present obligation for future sacrifices. |

|foreclosure |A remedy provided by state law for creditors secured by an interest in real property to obtain title to the property |

| |under certain conditions. |

|foreign exchange risk |One of nine risks defined by the OCC. The risk to earnings or capital arising from adverse movement of foreign exchange |

| |rates. The Federal Reserve includes this risk in its definition of market risk. |

|forward cash exposure (FCE) |A term sometimes used to describe the quantity of a financial institution's liquidity risk. See counter balancing |

| |capacity. |

|forward delivery |The transfer of commodities or foreign exchange at a specified date subsequent to the date of the contract that provides|

| |for the transfer. |

|forward market |The informal (nonexchange) trading of foreign exchange or commodities to be delivered at a future date. Contracts for |

| |forward delivery are not standardized. Instead, the delivery time and amount are negotiated by the parties. |

|forward rate |The interest rate for a specified maturity of a fixed-income security for a future date. For example, the forward rate |

| |for six-month Treasury bills one month from today. See spot rate for contrast. |

|forward rate agreement (FRA) |A customized agreement between two parties specifying the rate to be paid at some future date. Usually tied to LIBOR. |

|forward roll |The sale of an investment position when the sale proceeds are used to acquire a new position that is very similar to the|

| |one that was sold. |

|forward yield curve |See yield curve. |

|forwards |Contracts for the sale/purchase of a specified quantity of a financial instrument, currency, or commodity at an |

| |agreed-upon price on a given future date. Unlike an option, a forward contract obligates both parties to consummate the |

| |transaction. Forwards are very similar to futures - the principal difference is that futures are almost always exchange |

| |traded while forwards are traded over the counter. |

|FRA |See forward rate agreement. |

|fraudulent conveyance/ |A transfer of an interest of the debtor made within one year prior to the filing of bankruptcy that is either made by |

|fraudulent transfer |the debtor with the intent to defraud its creditors or for which the debtor receives less than reasonable consideration.|

| |A fraudulent transfer may be set aside (reversed) by a bankruptcy judge. |

|Freddie Mac |An informal name for the Federal Home Loan Mortgage Corporation (FHLMC) or for securities issued by it. |

|free cash flow |Cash flow from operations minus capital expenditures and dividends. Cash flow from operations is reduced by those |

| |adjustments to generate a measure of cash available to meet other corporate purposes. While the above definition is |

| |commonly used by equity investors, bank credit analysts create similar measures of free cash flow that may involve more |

| |or different adjustments to cash flow from operations. |

|FRN |See floating-rate note. |

|front-end load |A form of sales charge imposed by some mutual funds. A front-end load is an initial charge that is deducted from each |

| |investment made in the fund. The amount of the charge is usually a percentage of the amount of the investment. See |

| |back-end load, load and no-load. |

|FTP |See funds transfer pricing. |

|full faith and credit |A pledge of the general taxing power for the payment of debt obligations. Bonds carrying such pledges are referred to as|

| |general obligation bonds or full-faith-and-credit bonds. |

|full payout |A phrase used to describe personal property leases that are structured such that the bank/lessor receives its total |

| |repayment from one customer/lessee and that the total repayment comes from the proceeds of rents, tax advantages, and |

| |the residual value assumption. |

|fund |A fiscal and accounting entity with a self-balancing set of accounts in which cash and other financial resources, all |

| |related liabilities and residual equities, or balances, and charges therein, are recorded and segregated to carry on |

| |specific activities or attain certain objectives in accordance with special regulations, restrictions, or limitations. |

|funded status |A term used to describe either the excess or shortfall of pension assets in relation to pension liabilities. When |

| |pension liabilities exceed the assets, the funded status is a shortfall. When a plan liquidation or termination is being|

| |analyzed, the funded status is calculated using the accumulated benefit obligation (ABO) as the liability value. When a |

| |plan's funded status is calculated to analyze the plan on a going concern basis, the projected benefit obligation (PBO) |

| |is used as the liability value. |

|funding gap |See liquidity mismatch. |

|funding liquidity risk or funding risk |The potential that an institution will be unable to meet its obligations as they come due because of an inability to |

| |liquidate a sufficient quantity of assets or to obtain a sufficient quantity of new liabilities. |

|funds pool |See pool. |

|funding pool | |

|funds transfer pricing (FTP) |An internal cost accounting system or methodology that transfers a cost of funds expense to profit centers that generate|

| |assets and a credit for funds to profit centers that provide funding. Most funds transfer pricing systems are matched |

| |maturity systems that attempt to reflect the term structure of interest rates in their transfer rates. Transfer rates |

| |may be allocated to pools of similar assets or liabilities, may be specifically allocated to individual assets or |

| |liabilities, or may employ a combination of those two approaches. |

|fungibles |Property that is indistinguishable from other property of the same type. Fungibles are completely substitutable or |

| |interchangeable. Two examples of fungibles are pork bellies and dollar bills. |

|future advance clauses |Provisions in mortgages or security agreements that attempt to extend the secured party’s interest in the collateral to |

| |cover future extensions of credit made by that creditor to the debtor. |

|futures |Contracts for the sale/purchase of a specified quantity of a financial instrument, currency, or commodity at an |

| |agreed-upon price on a given future date. First developed for agricultural commodities, actively traded futures are |

| |available for foreign currencies, stocks, stock indexes, U.S. Treasury debt, Eurodollar deposits, and other financial |

| |instruments. Futures are often used in hedging. Unlike an option, a futures contract obligates both parties to |

| |consummate the transaction. Futures are very similar to forwards - the principal difference is that futures are almost |

| |always exchange traded while forwards are traded over the counter. |

G

|G & A expense |A shorthand expression used by many bankers to refer to general and administrative expenses. These are a subgrouping of |

| |a firm's operating expenses. In most banks, the term refers to all operating expenses excluding interest, depreciation, |

| |and amortization. |

|GAAP |See generally accepted accounting principles. |

|gains trading |The practice of purchasing securities and then selling those that subsequently appreciate in value while retaining as |

| |investment portfolio assets those that cannot be sold at a profit. Accounting and banking regulators have repeatedly and|

| |strongly criticized this practice. Rules related to the transfer of securities from trading portfolios to |

| |available-for-sale (AFS) or held-to-maturity (HTM) portfolios are specifically designed to prohibit gains trading. |

|gamma |The rate of change of an option’s delta for a small change in the price of the option’s underlying. See delta. |

|gap |(1) As a measurement of exposure to interest rate risk, the amount of mismatch or imbalance between the quantity of an |

| |entity's assets and the quantity of its liabilities that reprice in a defined or selected time period. In a single time |

| |period, the net mismatch or imbalance may be called the interval gap. Over a series of consecutive time periods or |

| |buckets, the total net imbalance or mismatch may be called the cumulative gap. See rate-sensitive assets and |

| |rate-sensitive liabilities. |

| |(2) One of the four components of interest rate risk. The component of interest rate risk arising from the mismatch |

| |defined above. Also called mismatch or repricing risk. |

| |(3) As a measurement of liquidity risk, the amount of mismatch between the quantities of cash provided from decreases in|

| |liabilities and increases in assets and the quantities of cash used by increases in assets and decreases in liabilities |

| |in a defined or selected time period. |

|gap analysis |A technique or process for quantifying exposure to adverse consequences from changes in interest rates. A comparison of |

| |the total quantity of a financial institution's rate-sensitive assets (RSAs) and rate-sensitive liabilities (RSLs) for |

| |each of a number of different future time periods or buckets. Gap analysis is used to evaluate the potential effect of |

| |rate shocks on income over these time periods. See gap, rate-sensitive assets and rate-sensitive liabilities. |

|gapping |Mismatching assets and liabilities, usually by borrowing short and lending long. |

|GASB |See Government Accounting Standards Board. |

|general fund |In fund accounting, the fund used to account for all financial resources, except those required to be accounted for in |

| |another fund. Often used as and referred to as the operating fund. |

|general intangibles |A category of personal property defined by Article 9 of the UCC. General intangibles is a catch-all term for intangibles|

| |other than accounts such as copyrights, trademarks, patent rights, franchise rights, good will, tax refunds, relocation |

| |claims, operating rights, and legal claims. |

|general obligation (GO) |A municipal obligation that is supported by the full faith and credit — the full taxing authority — of the municipality |

| |(as opposed to support from only the revenues from specific user fees). |

|general partnership |A partnership in which every partner is fully liable to the full extent of his, her, or its net worth for all the |

| |obligations of the partnership. |

|generally accepted accounting principles|Accounting treatments that fully conform to established rules from the American Institute of Certified Public |

|(GAAP) |Accountants (AICPA). For all nongovernment entities in the United States, GAAP is primarily determined by the Financial |

| |Accounting Standards Board (FASB). For state and local government entities in the United States, GAAP is primarily |

| |determined by the Government Accounting Standards Board (GASB). Both FASB and GASB function under the auspices of the |

| |Financial Accounting Foundation (FAF), an independent, nonprofit foundation. |

|geographic liquidity risk |A type of systemic risk where deterioration in regional economic conditions triggers liquidity crisis. Usually, such a |

| |crisis is triggered by credit loss. See systemic liquidity risk. |

|giants |FHLMC MBSs created when older pools that have been reduced to small outstanding balances (i.e., low current face) as a |

| |result of cumulative prepayments are combined to create new securities with larger remaining balances. Giants may be |

| |either fixed- or adjustable-rate securities. |

|Ginnie Mae |An informal name for the Government National Mortgage Association (GNMA) or for securities issued by it. |

|GLBA |See Gramm-Leach Bliley Act of 1999. |

|GNMA |See Government National Mortgage Association. |

|gnome |Fifteen-year FHLMC MBS pool that is issued under the FHLMC fifteen-year Cash Program. See nongnome. |

|GO |See general obligation. |

|good delivery |(1) Delivery of a security, from a seller to a buyer, that complies with all terms of the contract of sale. |

| |(2) For a new, to-be-announced MBS, good delivery is delivery by the seller that conforms to rules published by the Bond|

| |Market Association (BMA). |

|good faith estimate |A document that lenders are required by regulation to provide all applicants for covered real estate loans. This |

| |document discloses the anticipated expenses that the applicant(s) will have to pay if the covered transaction is |

| |approved and closed. |

|goods |A category of personal property defined by Article 9 of the UCC. Sometimes called tangible goods. Further divided into |

| |consumer goods, equipment, farm products, and inventory. |

|Government Accounting Standards Board |An accounting industry organization; part of the Financial Accounting Foundation. GASB issues Statements of Financial |

|(GASB) |Accounting Standards that define and govern GAAP for state and local government entities in the United States. |

|Government National Mortgage Association|A government-owned corporation that is part of the U.S. Department of Housing and Urban Development. GNMA provides its |

|(GNMA) |guarantee, backed by the full faith and credit of the United States Government, to certain mortgage-related securities. |

| |Informally but widely known as Ginnie Mae. |

|grace period |A time period, usually one or more months, during which the debtor may delay principal repayment without incurring a |

| |penalty. |

|GPM |See graduated payment mortgage. |

|graduated payment mortgage (GPM) |A mortgage in which the monthly payment of principal and interest begins at a low amount and progressively increases to |

| |a predetermined higher amount. Thereafter, the amount of the monthly payment remains constant for the remaining life of |

| |the loan. The interest rate is fixed for the entire period. |

|Gramm-Leach Bliley Act of 1999 (GLBA) |Major banking legislation designed to significantly enhance the powers and authority of financial institutions by |

| |allowing the formation of new financial holding companies. Financial holding companies are authorized to engage in: |

| |underwriting and selling insurance and securities, conducting both commercial and merchant banking, investing in and |

| |developing real estate and other "complimentary activities." The statute also restricts the disclosure of nonpublic |

| |customer information by financial institutions and provides the major financial regulators with increased authority. |

|grantor |A person, partnership or corporation that gives or conveys an interest in property. Often used to identify the creator |

| |of a trust. |

|gross-bonded debt |The total amount of direct debt of an issuer, represented by outstanding bonds before deduction of any assets available |

| |and earmarked for their retirement. |

|gross margin |See margin. |

|gross profit |A subtotal on a firm's statement of income that is net sales minus cost of goods sold. Sometimes called gross profit on |

| |sales. |

|gross sales |The total dollar value of all revenue derived by the firm from the principal operations of its business during the |

| |period covered by the income statement report. |

|group sort |A service enabling a collecting bank to deposit checks drawn on a limited preselected group of payer institutions. |

|guarantee |See guaranty. |

|guaranteed bonds |A type of corporate bond for which a corporation other than the issuing corporation guarantees the repayment of a bond |

| |issue. Usually, the guarantee is provided by the parent firm of the issuing corporation. |

|guaranty |An agreement by a person, partnership, or corporation (other than the borrower) to repay a bank loan if the borrower |

| |does not pay. |

|guidance line of credit |A line of credit approved by the bank, but not disclosed to the borrower until some specific event, usually a request |

| |for funding from the borrower. Also called an unadvised line. |

H

|haircut |(1) A lender's informal expression for a collateral margin. The amount by which the value of collateral exceeds the loan|

| |it secures. Commonly used with repurchase and reverse repurchase agreements informally called repos and reverses. |

| |(2) The dealer's commission for a transaction. |

|handle |An informal name for the portion of a security's price that is comprised of the numbers to the left of the decimal |

| |point, colon, or dash. For example, if a bond's price is 103.25, its handle is 103. Sometimes brokers and dealers only |

| |quote the numbers to the right of the decimal point and assume that the handle is understood. |

|hard call protection |For convertible bonds, one of two types of call protection. Hard call protection prohibits an issuer from calling an |

| |issue within a certain period of time. For convertible bonds, hard call protection is most often set at three years, but|

| |can range from two to five years. |

|hazard insurance |Insurance covering losses incurred by an insured as a result of damage, destruction, or loss of property. Mainly, but |

| |not entirely, insurance against fire and lightning damage. Insurance other than life or liability insurance. |

|health care insurance receivable |An interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health care|

| |goods or services. A category of personal property collateral defined by the 2001 revisions to Article 9 of the UCC. |

|hedge |(1) Verb— To reduce risk or behavior that reduces risk from future price movements. |

| |(2) Noun — A transaction undertaken to reduce risk by offsetting the risk in another transaction. The risk in one |

| |position is hedged by counterbalancing it with the risk in another transaction. The values of each position must change |

| |inversely and with a high degree of correlation. Hedges may be cash to cash in which a position in a cash instrument |

| |such as a loan or investment reduces or offsets the risk in another cash position such as a deposit. For example, a |

| |$1,000,000 investment in a U.S. Treasury bond maturing in 10 years and a $1,000,000 certificate of deposit are largely |

| |(but not completely) offsetting risks. Hedges may also be cash to futures or futures to futures. |

|hedge accounting |Deferring recognition of unrealized gains and losses from a hedge instrument until the corresponding gains or losses |

| |from the hedged instrument(s) are recognized. See FAS 133 and FAS 149. |

|hedge effectiveness |The extent to which a hedge transaction results in the offsetting changes in value or cash flow that the transaction was|

| |and is intended to provide. FAS 133 requires users to regularly assess the effectiveness of hedges. Furthermore, under |

| |FAS 133 only the portion of a transaction that is deemed effective may qualify for hedge accounting treatment. Under FAS|

| |133, any part of fair value changes in a derivative that are not perfectly correlated with the fair value (or variable |

| |cash flow) changes of the hedged item must be reported in current earnings. FAS 133 does not delineate a specific |

| |methodology for assessing whether a hedge is expected to be highly effective or for measuring hedge ineffectiveness. |

| |Hedge effectiveness is a very broad concept, and FASB believes each company must define it relative to the intent of its|

| |hedging activities. The only requirement is that there be a reasonable basis for assessing hedge effectiveness. The |

| |focus on hedge effectiveness in FAS 133 contributes to a significant difference between previous practice and the new |

| |accounting standard. Whereas the earnings effect of minor hedge ineffectiveness was spread over the life of the hedge in|

| |the past, the FAS 133 rules result in anything other than perfect correlation being recorded in current earnings. Thus |

| |under FAS 133 there is the potential (and even likelihood) that hedges may have both an effective component and an |

| |ineffective component even for a highly effective hedge. The fact that some portion of a derivative is ineffective does |

| |not preclude a hedge from being deemed highly effective. See cash flow hedge, fair value hedge, and FAS 133. |

|hedge ratio |The relationship between the size of a position needed in a hedge instrument and the size of the position being hedged. |

| |The hedge ratio is determined by the delta. |

|held-to-maturity (HTM) |One of three defined categories established in FAS 115 for the classification of financial instruments held as assets on|

| |the books of an investor. HTM securities are those the investor intends to hold to maturity and is able to hold to |

| |maturity. Designation of a security as HTM allows the investor to report the security value at historical cost plus |

| |accretion or minus amortization. Unrealized gains or losses are not shown on the balance sheet, reflected in reported |

| |income, or reflected in reported net worth. FAS 115 imposes conditions that restrict an investor’s flexibility to remove|

| |securities from the HTM category. See available-for-sale, FAS 115, and trading. |

|hidden option |An option feature in an instrument in which the option feature is only a minor feature of that product. Sometimes called|

| |an embedded option. They are hidden because they are not separate, detachable features that issuers or holders can add |

| |or subtract to customize individual transactions. Instead, they are one part of a number of features embedded in the |

| |product. |

|high-grade |A phrase used to describe investments with the highest quality ratings — usually AAA or AA. |

|high-yield securities |(1) A formal name for junk bonds. |

| |(2) All bonds in the following credit categories as defined by NASD Rule 6200 Series as "Non-Investment Grade": BB, B, |

| |CCC, CC, C, C, and NA/NR. |

|histogram |A table or bar chart displaying a probability distribution. All of the probabilities in the histogram total to 100 |

| |percent. The frequency of the data for each interval is represented by the height of the bar. The technique can be used |

| |to combine a group of individual rate forecasts to obtain a single probability weighted average of the various |

| |subjective predictions for interest rates. |

|historical VAR |A measure of a financial instrument’s, a portfolio of financial instruments’, or an entity’s exposure to reductions in |

| |value resulting from changes in prevailing interest rates. Historical VAR is one of several different methods for |

| |calculating VAR. Historical VAR calculates value at risk by comparing the actual volatility of components or risk |

| |elements within a portfolio to the historical sensitivity of those components. This provides a range or distribution of |

| |possible losses. A single value at risk can then be calculated for the selected confidence level. Historical VAR is |

| |generally preferred for its ability to capture risk from unlikely events. However, the measured amount of VAR is heavily|

| |influenced by the choice of time horizon and by the volatility that occurred during that historical time period. If |

| |future changes do not resemble the change in value that occurred during the selected time horizon, the forecasted VAR |

| |will not be a good indicator of the real risk. See correlation VAR, empirical VAR, and value at risk (VAR). |

|HMDA |See Home Mortgage Disclosure Act. Pronounced hum-da. |

|hold |A process by which a bank restricts funds deposited by checks. Usually but not always used to restrict the proceeds of |

| |checks drawn on other banks until the funds have been transferred by the drawor’s bank to an account that the |

| |depositor’s bank maintains with the Federal Reserve. |

|hold-harmless agreement |A contract under which the liability of one party for damages is assumed by another. |

|Home Mortgage Disclosure Act (HMDA) |A Federal statute that requires most lenders in metropolitan areas to collect data about their housing-related lending |

| |activity. Lenders must file annual reports with their Federal supervisory agencies and make disclosures available to the|

| |public regarding their origination of housing-related loans. The reports cover loan originations, applications that are |

| |declined or withdrawn, and loan purchases. The data is used to evaluate possible discrimination in loan approvals. The |

| |Federal Reserve Board of Governors has adopted Regulation C to implement this statute. The information collection |

| |requirements were expanded in 2004. See loan application register. |

|Home Ownership and Equity Protection Act|A 1994 Federal statue enacted to address perceived abuses in high cost home mortgage lending. Final rules implementing |

|(HOPEA) |this law where adopted by the Federal Reserve Board as amendments to Regulation Z, Truth-In-Lending in December 2001. |

|horizon analysis |A less-common name for total return analysis. The term "horizon analysis" derives from the fact that total return |

| |analysis requires the user to select an ending date for the investment being analyzed. That ending date is sometimes |

| |called the investor's horizon. |

|hot money |An informal term used to describe funds provided by the most price-sensitive and credit quality-sensitive sources. The |

| |bank liabilities that are likely to be lost most quickly in the event of a loss of confidence or competitiveness. |

|HUD |See Department of Housing and Urban Development. |

|hybrid or hybrid security |A package or combination of financial instruments. Hybrid structures range from simple to highly complex. See structured|

| |notes. |

|hypothecation |(1) An archaic term for pledging that did not involve either possession or title transfer. |

| |(2) Any pledge of an asset as collateral for a debt. (An uncommon but correct usage.) |

| |(3) The pledge of marketable securities or deposits to secure a loan — particularly the pledge of marketable securities |

| |or deposits owned by someone other than the borrower. |

I

|IAN |See index amortizing note. |

|IAS |See index amortizing swap. |

|IDA |See Industrial Development Authority. |

|IDB |See Industrial Development Authority bond. |

|IDC |Acronym for Industrial Development Corporation. See Industrial Development Authority. |

|imbedded option |See embedded option. |

|immobilized |A physical certificate representing ownership of a security (a stock certificate or bond) that is held by a trustee. An |

| |arrangement through which a physical certificate is held so that all future transactions can be conducted as if the |

| |security were book entry. Ownership and liens are recorded in the books of the trustee rather than evidenced by physical|

| |possession of the certificate. Also called dematerialized. |

|immunization |Establishing and maintaining equal and offsetting exposures to interest rate risk. For example, holding equal amounts of|

| |assets and liabilities of the same duration. |

|implied forward rates |Indicated future interest rates derived from the differences between current rates for different maturities of the same |

| |instrument. Yield curves include implied information about future interest rates. For example, suppose that a 2-year |

| |investment offers a return of 6 percent while an otherwise identical 1–year investment offers a return of 5 percent. In |

| |this case, an investor who bought the 1-year investment and realized a return of 5 percent for the first year would have|

| |to be able to reinvest his money at 7 percent in the second year in order to get an average 2-year return of 6 percent. |

| |If the investor gets less than 7 percent in the second year, he will not do as well as the investor who purchased the |

| |2-year investment. This implies that the rate for 1-year investments that will be available one year in the future will |

| |be 7 percent. |

|implied volatility |Volatility of a financial instrument that is imputed by subtracting all of the other factors thought to contribute to |

| |the price of an option. The amount remaining after those subtractions is attributed to volatility. Implied volatility is|

| |not the same as the actual volatility. See realized volatility, volatility and variance swap. |

| | |

|implied waiver |A legal name for a situation in which a lender is deemed to have lost the right to enforce a provision in the loan |

| |documents as a result of the lender's failure to enforce the same provision when it was previously violated. |

|in the money |The situation in which an option has value because of the relationship between the option's strike price and the current|

| |market price for the underlying instrument, the spot price. A call option is in the money when the strike price is below|

| |the spot price. A put option is in the money when the strike price is above the spot price. |

|income notes |See equity tranche. |

|incumbency certificate |A list of the names of the individuals holding various corporate offices within a corporation. |

|indemnification agreement |An agreement in which the borrower promises to protect the bank or reimburse the bank for any damages, claims, costs, |

| |penalties, or liabilities that may arise from some problem. For example, the bank may obtain an indemnification |

| |agreement to protect itself from costs, penalties, or liabilities arising from environmental contamination or from |

| |violations of environmental regulations. |

|indenture covenants |See covenants. |

|indeterminate maturity |An unspecified maturity date for a financial instrument. For example, the maturity date of a savings account. |

|index |A benchmark upon which the payment rate or accrual rate for an adjustable-rate loan or investment is based. For example,|

| |a business loan may pay interest at the prime rate plus 1 percent. In that example, the prime rate is the index. For |

| |adjustable-rate residential mortgage loans, federal law requires that indexes must move independently (not controlled by|

| |the lender) and that indexes must be easily confirmed by borrowers. See margin and reset date. |

|index amortizing note (IAN) |Securities which repay principal according to a predetermined amortization schedule that is linked to the level of a |

| |specific index or a specific prepayment rate. As market interest rates increase or prepayment rates decrease, the |

| |maturity of an IAN extends. An IAN is a type of structured note. |

|index amortizing swap (IAS) |A type of amortizing interest rate swap in which the notional amount declines or amortizes based upon a specific index |

| |such as a mortgage prepayment speed. |

|indirect costs |In cost accounting applications, the share of costs imputed, attributed or allocated to the cost center or product being|

| |measured. |

|indirect leases |A form of lease financing in which the bank acquires or finances a lease transaction entered into by an end user and a |

| |third party. The third party is the lessor and the end user is the lessee. The bank is the lender to the third party if |

| |it merely finances the transaction or the assignee of the third party if it purchases the lease. |

|Industrial Development Authority (IDA) |Special types of municipal authorities established to promote economic development in their communities. A community |

| |establishes an Industrial Development Authority to act as a conduit. The authority can, as a municipal entity, borrow |

| |funds or sell securities that are, in most cases, exempt from federal income tax. Consequently, the authority can raise |

| |funds at lower interest rates than businesses. The lower-cost funds are used by the authority to buy fixed assets that |

| |are then leased to the business. The lease rate reflects the authority’s low cost of capital. See Industrial Development|

| |Authority bond. |

|Industrial Development Authority bond |A special type of revenue bond issued by municipal authorities established to promote economic development in their |

|(IDB) |communities. A community establishes an Industrial Development Authority to act as a conduit. A business that would |

| |otherwise have to borrow at taxable interest rates to finance the purchase or construction of a building may, under some|

| |defined circumstances, let the IDA own the building and pay rent to the authority with an option to purchase. The |

| |authority borrows at a lower, tax-exempt rate. The authority has no responsibility for the payment of interest and |

| |principal on the securities except to pass the business’s rent payments through to the investors. The business’s rent |

| |payments equal the interest and principal due for the lower rate, tax-exempt securities. |

|Industrial Revenue Authority bond (IRB) |See Industrial Development Authority bond. |

|ineffective hedge |See hedge effectiveness. |

|insecurity clause |A provision found in some promissory notes that attempts to give the lender the right to demand payment in full at any |

| |time the lender deems itself insecure. More often than not, such a clause is unenforceable except when other material |

| |defaults are also involved. |

|insiders |A legal term used in bankruptcy to describe parties that have a special relationship to the bankrupt debtor. Creditors |

| |who are officers, directors, or stockholders are obvious examples of insiders. In some cases, the bank may be deemed to |

| |be an insider. The main consequence of being deemed an insider is that insiders are subject to a one-year preference |

| |period while other creditors are only subject to a 90-day preference period. See preference. |

|insolvency |The lack of adequate capital. The condition that exists when the amount of losses exceeds the amount of capital. See |

| |solvency and solvency risk. |

|installment note |In consumer lending, name used to describe a promissory note that calls for mostly regular, periodic payments of |

| |principal and. |

|instrument-specific liquidity risk |A type of systemic or capital markets liquidity risk. The risk that the failure of a market for a financial instrument, |

| |such as the commercial paper market, might trigger a bank funding crisis. See systemic liquidity risk. |

|instruments |A category of personal property defined by Article 9 of the Uniform Commercial Code. Instruments are notes, checks, |

| |drafts, securities (such as stocks and bonds), and any other written evidence of rights to the payment of money that, in|

| |the ordinary course of business, is transferred by delivery with any necessary endorsements or assignments. See |

| |financial instrument |

|in-substance defeasance |An advanced refunding in which the debtor is not legally released from being the primary obligor on the refunded bonds, |

| |but the possibility of the debtor having to make additional payments is considered remote under criteria provided by FAS|

| |76. |

|insurance binder |See binder. |

|intangible pension asset |An asset booked to offset the additional minimum pension obligation. This asset is created under the FAS 87 rules to |

| |offset the minimum liability for underfunded plans that FAS 87 required firms to recognize as a liability. Little or no |

| |justification can be made to support the classification of this debit as an asset; it is conceptually more accurate to |

| |consider it as a reduction to equity. |

|intangibles |An informal term used by secured lenders to refer to the categories of personal property defined by Article 9 of the |

| |Uniform Commercial Code as accounts and general intangibles. |

|intercompany accounts |Accounts receivable or payable from or to affiliated companies. |

|intercompany eliminations |Accounting entries made on consolidating statements in the process of generating consolidated financial statements. |

| |Intercompany eliminations cancel the accounting effects of transactions between firms in the consolidated group so that |

| |the final consolidated numbers exclude all transactions between entities in the group. |

|interest |(1) A monetary benefit paid by a borrower for the right to use a lender’s or a depositor’s funds. Usually, the interest |

| |is paid periodically over the life of the loan, deposit, or security. However, some interest-bearing instruments, such |

| |as savings accounts, do not have defined maturities. Under the terms of some instruments, interest is not paid |

| |periodically over the life of the instrument but instead is paid solely at the end of the loan/deposit/security term. |

| |(2) A right to enjoy some benefits of ownership of property. For example, the rights that a debtor or a court grants to |

| |a secured party in the assets owned by the debtor. Or, for example, the rights that a lessee is granted in the lease of |

| |property owned by a lessor. |

|interest-coverage ratio |A ratio that uses historical financial information. sometimes combined with projected financial information, to measure |

| |a firm's short-term credit strength. This ratio measures the firm's ability to make its required interest payments. In |

| |its simplest form, the ratio takes the firm's pretax net income plus interest expense and divides that sum by the |

| |interest expense. Interest-coverage ratios can be calculated with several variations. One variation involves using next |

| |year's projected interest expense in the denominator rather than the most recent year's actual interest expense. A |

| |second variation reduces net income by deducting nonrecurring income amounts. Other variations are in use. Sometimes |

| |called times interest earned. |

|interest-only strip (I/O) |A form of stripped mortgage-backed security (MBS) that only passes interest payments received from the underlying |

| |mortgage loans to the security owners. May be a real estate mortgage investment conduit (REMIC) tranche. |

|interest rate cap |See cap. |

|interest rate floor |See floor. |

|interest rate risk (IRR) |The potential that changes in market rates of interest will reduce earnings and/or capital. The risk that changes in |

| |prevailing interest rates will adversely affect assets, liabilities, capital, income, and/or expense at different times |

| |or in different amounts. The Federal Reserve calls this type of risk market risk and defines it as the risk to a |

| |financial institution’s condition resulting from adverse movements in market rates or prices, such as interest rates, |

| |foreign exchange rates, or equity prices. Within that definition, the Federal Reserve clearly views interest rate risk |

| |as just one component of market risk. The Office of the Comptroller of the Currency (OCC) defines interest rate a bit |

| |more narrowly than the Federal Reserve since it defines price risk as a separate risk. The OCC defines price risk as the|

| |risk to earnings or capital arising from adverse changes in the value of portfolios of financial instruments. Since such|

| |adverse changes generally result from changes in prevailing interest rates, price risk is essentially the same as |

| |interest rate risk. Most rate risk managers use the term in the broadest sense as defined in the first sentence of this |

| |paragraph. Interest rate risk has four components. See basis risk, mismatch risk, option risk and yield curve risk. |

| |Closely related to price risk and market risk. |

|interest rate swap |A financial instrument representing a transaction in which two parties agree to swap or exchange net cash flows, on |

| |agreed-upon dates, for an agreed-upon period of time, for interest on an agreed-upon principal amount. The agreed-upon |

| |principal amount, called the notional amount, is never exchanged. Only the net interest cash flows are remitted. In the |

| |simplest form of interest rate swap, one party agrees to swap fixed-rate loan payments with the floating-rate payments |

| |of the other party. Interest rate swaps are often used in hedging. See basis swap and swap. |

|interim statements |Financial statements prepared for periods other than the firm's fiscal year-end. |

|internal float |Elapsed time for processing checks. Also called administrative float or processing float. |

|internal liquidity risk |A term defined by the Federal Reserve. Internal liquidity risk relates largely to funding problems arising from |

| |unfavorable changes in the perception of an institution in its various markets: local, regional, national, or |

| |international. See bank-specific liquidity risk, external liquidity risk and systemic liquidity risk. |

|internal rate of return (IRR) |A measure of yield that relates the cash flow from each interest payment and the cash flow from the investment's |

| |redemption value at maturity to the purchase price of the investment. It is a present value calculation that reflects |

| |the time value of each of those cash flows. By calculating the present value of the cash flows, the IRR reflects the |

| |reinvestment income that the investor can earn from reinvesting those cash flows, at the same yield as the investment |

| |that generated them, during the life of the investment. |

|International Swaps and Derivatives |A global trade association representing participants in the privately negotiated (i.e., nonexchange traded) derivatives |

|Association, Inc. (ISDA) |industry. Most derivatives transactions use a standard set of three documents often called "the ISDA". See master |

| |agreement. |

|interpolation |The mathematical process of obtaining an unknown number that has a value between two known numbers in a series of |

| |numbers. For example, if the yields or prices for 2-, 3-, and 5-year Treasury notes are known, a yield or price for |

| |4-year Treasury notes can be extrapolated or interpolated. Interpolated values are not always correct, but they are |

| |usually close enough for most users. |

|intrinsic value |That portion of an option’s value that derives from the fact that the option is in the money. The difference between |

| |exercise price of the option and the price of the underlying. The other primary component of an option's price is its |

| |time value. |

|inventory |A category of goods defined by Article 9 of the Uniform Commercial Code. Inventory is goods held for sale or lease. It |

| |includes raw materials, work-in-progress, finished goods, and materials used or consumed in a business. |

|inverse floater |Bonds whose coupon rates increase as rates decline and decrease as rates rise. The coupon rate is based on a formula |

| |using an index and moves in the opposite direction of changes in that index. Some inverse floaters may be a type of |

| |structured note. Other inverse floaters, such as interest-only (I/O) and principal-only (P/O) strips are types of |

| |collateralized mortgage obligations (CMOs). |

|inverted yield curve |See yield curve slope. |

|investment grade |A term defined by the Office of Comptroller of the Currency (OCC) (12 CFR 1) and used in its investment regulation to |

| |define eligible investments. Investment grade means a security that is rated in one of the four highest rating |

| |categories by either: |

| |(1) Two or more nationally recognized statistical rating organizations (NRSROs); or (2) One NRSRO if the security has |

| |only been rated by one NRSRO. |

| |See NRSRO. |

|investment premium (for convertible |The amount by which it’s the convertible bond’s market price exceeds its value as a bond only, expressed as a |

|bonds) |percentage. The calculation is done by subtracting the investment value from the market value and dividing the |

| |difference by the investment value. |

|investment property |(1) Certificated or uncertificated security, entitlement, securities account, commodity contract, or commodity account. |

| |A category of personal property collateral defined by the 2001 revisions to Article 9 of the Uniform Commercial Code. |

| |See certificated and uncertificated. |

| |(2) An informal term for real estate owned for investment rather than the owner’s use. |

|investment security |As defined by the Office of the Comptroller of the Currency (OCC) (12 CFR 1), a marketable debt obligation that is not |

| |predominantly speculative in nature. A security is not predominantly speculative in nature if it is rated investment |

| |grade. When a security is not rated, the security must be the credit equivalent of a security rated investment grade. |

| |See marketable and investment grade. |

|investment value (for convertible bonds)|The value of a convertible bond calculated as a straight bond without giving any value to the conversion feature. |

| |Although this is done according to normal bond calculations, the rate used to discount the bond is that for similar, |

| |nonconvertible debt. The discount rate is likely to be two to five percentage points higher than the convertible’s |

| |coupon rate. Also called the bond value. |

|IO or I/O |See interest-only strip. |

|IRB |See Industrial Development Authority bond. |

|IRR |See internal rate of return and interest rate risk. |

|ISDA |See International Swaps and Derivatives Association. |

|ISDA master agreement |An industry-standard agreement used between the counterparties to privately negotiated (i.e., nonexchange traded) |

|a.k.a. the ISDA |derivatives transactions. The body of the master agreement" presents the most common legal and operating terms and |

| |conditions that could apply to derivatives transactions between parties to the agreement. These include basic |

| |representations, events of default and termination events, numerous contractual housekeeping items, and a list of key |

| |definitions. The provisions in the master agreement itself are non-negotiable so users customize the agreement in the |

| |"schedule", selecting from terms provided in the master agreement or adding new provisions. The schedule contains a |

| |number of optional provisions that counterparties can choose to select or add. A third and final part of the ISDA is a |

| |"Credit Support Annex" (CSA),that details the terms of certain credit support required in the Agreement. |

|issue date |The date on which interest for a new security issue begins accruing. For mortgage-backed bonds, the issue date of the |

| |pool is not the same as the origination date of the underlying mortgages. A pool may be assembled from new loans or from|

| |older loans. |

|issuer |A party or entity that sells a security representing a claim on its assets (an equity security) or its contractual |

| |obligation to pay the holder at a future date (a debt security). |

J

|joint and several |A legal expression used to indicate that two or more parties each are fully liable rather than together fully liable. |

| |For example, if two individuals execute joint and several guaranties, either one can be asked to repay the entire amount|

| |of the guaranteed debt. |

|judgment |A sum due for payment or collection as a result of a court order. |

|judgment clause |A provision in bank promissory notes or guaranties. In this clause, the borrowers or guarantors authorize the bank to |

| |create a judgment lien at any time after the documents have been executed. The bank only has to take the documents to a |

| |court. Many states prohibit judgment clauses. |

|judgment lien |See judicial lien. |

|judicial lien |An interest in property acquired from a judicial or court proceeding. A judicial lien is usually the result of a |

| |judgment that a winning party of a lawsuit receives in the form of a court order. See consensual lien and statutory lien|

| |for alternative types of liens. |

|jumbo CDs |An informal name for certificates of deposit of $100,000 or larger. In order to include accrued interest within the |

| |$100,000 federal deposit insurance coverage, some banks issue $98,000 jumbo CDs. |

|jump Z tranche |A Z tranche in a real estate mortgage investment conduit (REMIC) that is permitted to receive principal payments before |

| |prior tranches are retired. |

|junior creditor |A creditor holding junior debt. |

|junior debt |Obligations of an issuer for which repayment has contractually been given a priority that is lower than the repayment |

| |priority of other debts of the same obligor. This arrangement may arise from either a specific subordination agreement |

| |or a public issuance of subordinated debt instruments. |

|junior subordinated notes |See equity tranche. |

|junk bonds |An informal name for high-yield securities with quality ratings below investment grade (i.e., rated lower than Baa). |

K

|kappa |A Greek letter used in the financial industry to represent the sensitivity of an option’s price to changes in the price |

| |volatility of the underlying. |

|key rate duration |A measure of duration that calculates effective or empirical duration by changing the market rate for one specific |

| |maturity point on the yield curve while holding all other variables constant. May be done as part of a series of |

| |calculations that separately and sequentially vary the yields for two or more maturity points on the yield curve. Sets |

| |of partial durations for multiple points on the same yield curve will sum to a value that is usually close to the |

| |overall effective duration. Also known as reshaping duration. Key rate duration is the most common type of partial |

| |duration and those terms are often used as synonyms. See effective duration, empirical duration and partial duration. |

|kitchen sink bonds |(1) An informal name for some re-REMICs created when tranches of existing CMO REMICs are combined and used to |

| |collateralize new securities. A re-REMIC that combines highly volatile tranches is called a kitchen sink bond. Kitchen |

| |sink bonds are very high-risk securities. |

| |(2) An old term from CDOs. |

|knot points |The points on a yield curve for which there are observable prices for traded instruments. Rates for all maturity points |

| |between the knot points are "filled in" using any one of a variety of techniques for yield curve smoothing. See |

| |smoothing. |

|kurtosis |See fat tail. |

L

|L/C or LC |See letter of credit and line of credit. |

|laddered maturities |A maturity pattern within a portfolio in which maturities of the assets in the portfolio are equally spaced. Over time, |

| |the shortening of the remaining lives of the assets provides a steady source of liquidity or cash flow. |

|land contract |Contractual arrangement used in some states under which a buyer purchases real estate from a seller over a period of |

| |time, usually by making periodic installment payments. Title is not conveyed to the buyer until the final payment is |

| |made. Also called an article of agreement. |

|land flip |A colloquial expression used by some lenders and real estate developers to describe an abuse intended to overstate the |

| |purchase price of real estate collateral. Typically a land flip involves a sale of real estate at an inflated price that|

| |is not an arm’s length transaction. An example of this kind of abuse might be a property purchased by X for $50,000 and |

| |one year later sold to a partnership involving X for $100,000. |

|landlord’s waiver |A loan document used in a number of different situations. Most often used when inventory or equipment lenders are |

| |secured by collateral located in premises leased by the borrower. In those cases, the secured lender may request a |

| |landlord’s waiver to establish the lender’s right to enter the premises and to control or remove the collateral. May |

| |also be used to obtain a landlord’s permission and waiver of rights when a lender takes a security interest in leasehold|

| |improvements made by a borrower/tenant. |

|LAR |See loan application register. |

|last in, first out (LIFO) |One of the methods for accounting for business inventory permitted by generally accepted accounting principals (GAAP). |

|late charges |Charges that are assessed for late payments of principal or interest on a loan. Late charges may be determined as a |

| |percentage applied to the unremitted payment or as a fixed dollar amount. Some states limit late charges. Federal |

| |Regulation AA prohibits a practice called cascading late charges for consumer loans. |

|LBO |See leveraged buyout. |

|lease |A contract providing for the use of property in which one party (the owner, landlord, or lessor) allows another party |

| |(the tenant or lessee) to use the property in exchange for value given to the lessor. May cover either real or personal |

| |property. Long-term, noncancelable leases, called capital leases, must be carried on the lessee’s balance sheet as |

| |liabilities under GAAP. When they are recorded on the lessee’s balance sheet, they are said to be capitalized. |

| |Short-term, cancelable leases, sometimes called operating leases, do not have to be capitalized. |

|leasehold improvements |Things such as walls, air conditioners, and shelves that are added to leased space. |

|leasehold mortgages |Collateral interests in real property leased by the borrower. For example, a borrower may own a building located on |

| |leased land. In those cases, a lender will take a leasehold mortgage covering the borrower’s interest in both the leased|

| |land and the building. |

|lease purchase agreement |A lease that includes an option for the lessee to purchase the leased property at a time and under terms specified in |

| |the lease. |

|ledgering |A type of secured, working capital lending. See dominion of funds. |

|legal risk |The risk to earnings or capital arising from unenforceable contracts, lawsuits, adverse judgments, or nonconformance |

| |with laws, rules, and regulations. One of six risks defined by the Federal Reserve. The Office of the Comptroller of the|

| |Currency (OCC) uses a slightly narrower definition for what it calls compliance risk. |

|lender’s loss payable clause |A provision in a hazard insurance contract stipulating that in the event of a loss, proceeds will be paid to a secured |

| |party. Usually used when the insured property is personal property. This is the personal property version of the |

| |standard mortgagee clause. Unlike a more common loss payable clause, the lender’s loss payable clause is actually a |

| |stronger, much broader type of insurance policy stipulation. Under the lender’s loss payable clause, the secured party |

| |is protected against any act or neglect of the insured that may otherwise invalidate the policy for the owner. (Some |

| |states use a different form that also provides broader coverage than the simple loss payable clause.) |

|lender liability |An informal term referring to various manifestations of actual or potential legal liability arising from the conduct of |

| |a financial institution lender. Generally, lender liability arises from allegations that a lender has violated a duty |

| |(whether implied or contractual) of good faith and fair dealing owed to the borrower or has assumed a degree of control |

| |over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or |

| |shareholders. |

|letter of credit |An obligation issued by a bank on behalf of a bank customer to a third party. There are many different kinds of letters |

| |of credit. The two most common are commercial letters and standby letters. A commercial or trade letter of credit is a |

| |bank promise to pay the third party for the purchase of goods by the bank’s customer. A standby letter of credit is a |

| |bank promise to pay the third party in the event of some defined failure by the bank’s customer, usually, but not |

| |always, a failure to pay. Standby letters of credit are often used as credit enhancements for securities. |

|letter of credit right |A right to payment or performance under a letter of credit whether or not the beneficiary has demanded or is at the time|

| |entitled to demand payment or performance. The term does not include the right of a beneficiary to demand payment or |

| |performance under a letter of credit. A category of personal property collateral defined by the 2000 revisions to |

| |Article 9 of the Uniform Commercial Code. |

|letter stock |Stock that bears a restrictive legend on the certificate that limits the owner's ability to sell. All letter stock is |

| |restricted stock. |

|level factor amortization |Perhaps the best method of accounting for MBS premiums and discounts is the change in factor or level factor |

| |amortization method. Under the change in factor method, the amount of monthly premium amortization or discount accretion|

| |is calculated to be proportionate to the amount of the monthly principal payments. The alternative amortization method |

| |is called the effective interest method. |

|leverage |The amount of the owners’ or stockholders’ money relative to the money that lenders, suppliers and others have |

| |contributed to the firm. The ratio of owners' money to other peoples' money. |

|leveraged buyout |Corporate acquisitions in which the acquiring company borrows most or all of the funds needed to finance the purchase. |

| |In a typical leveraged buyout, the buyer intends to repay the finance debt from funds gained from either the sale of |

| |assets owned by the acquired company or from profits earned by the acquired company. The high level of debt associated |

| |with almost all leveraged buyouts makes them relatively high-risk transactions. Thus, while some bank financing is often|

| |involved, some form of junior debt is needed. The junior debt in leveraged buyout may come from a lender willing to take|

| |a subordinate position. This type of financing is often called mezzanine financing. The funds needed for a leveraged |

| |buyout may also be raised by issuing junk bonds. |

|leveraged leases |A form of lease financing in which the lessor/owner supplies only a portion of the cost of acquiring the leased property|

| |as equity. The remaining portion of the purchase price of the leased equipment is borrowed from long-term lenders. |

|LGIPs |See local government investment pools. |

|liability insurance |Insurance that protects a party from various types of claims. Typically liability insurance protects the insured from |

| |losses resulting from property damage claims or from bodily injury claims. Construction lenders usually require |

| |contractors to obtain and carry liability insurance to protect against claims resulting from the contractor’s |

| |operations. |

|liability management |A term used to describe the general banking strategy of focusing on the management of the amount, maturity, and cost of |

| |core deposits and purchased funds, with an emphasis on the latter. Under liability management, bankers make loans and |

| |loan commitments to meet market conditions without concern for funding. Liability managers increase or decrease the |

| |amount of funds obtained by the bank as necessary to provide whatever funding is needed at any given time. |

|liability sensitive |Describes an entity's position when an increase in interest rates will hurt the entity and a decrease in interest rates |

| |will help the entity. An entity is liability sensitive when the impact of the change in its assets is smaller than the |

| |impact of the change in its liabilities after a change in prevailing interest rates. This occurs when either the timing |

| |or the amount of the rate changes for assets cause interest income to change by more than the change in interest |

| |expense. The impact of a change in prevailing interest rates may be measured in terms of the change in the value of |

| |assets and liabilities. In that case, a liability sensitive entity’s economic value of equity decreases when prevailing |

| |rates rise or increase when prevailing rates fall. Alternatively, the impact of a change in prevailing rates may be |

| |measured in terms of the change in the interest income and expense for assets and liabilities. In that case, a liability|

| |sensitive entity’s earnings or net income decreases when prevailing rates rise and increases when prevailing rates fall.|

|LIBID |See London Interbank Bid Rate. |

|LIBOR |See London Interbank Offered Rate. |

|lien |An interest or encumbrance held by a creditor in a debtor's real or personal property for the satisfaction of a debt. |

| |The lien may arise as a result of a consensual contract between the debtor and the creditor such as a security agreement|

| |or a mortgage. Alternatively, liens may be established by courts or by statutes. See consensual lien, judicial lien and |

| |statutory lien. |

|lien search |The process or the result of investigations into the outstanding liens in a pledgor’s or potential pledgor’s property. |

| |The lien search not only investigates the existence of all liens but also the relative priority of those liens. For |

| |personal property, a lien search may be obtained in most states by submitting a standard form, called a UCC-4, to the |

| |appropriate filing office. Secured lenders often conduct preclosing lien searches prior to loan closings and postclosing|

| |lien searches shortly after loan closings. |

|life estate deed |A document used to convey title in real estate from one party to another but only upon the death of the grantor. A life |

| |estate allows the grantor the right to own or possess real estate until his or her death. Upon the life estate holder’s |

| |death, the property is automatically conveyed to another person or persons who hold a remainder interest. The holder of |

| |a remainder interest is often called a remainderman because he or she gets the remaining interest in the property. |

|lifetime cap |The upper limit for increases in the interest rate on a floating-rate or adjustable-rate instrument. |

|LIFO |See last in, first out. |

|LIFO reserve |The amount by which the book value of inventory is lower than it would be if first in, first out (FIFO) rather than LIFO|

| |accounting was applied to value the inventory. Only relevant to firms reporting inventory on a LIFO basis. |

|limited appraisal |One of two types of appraisals defined by the Uniform Standards of Professional Appraisal Practice (USPAP). Under USPAP,|

| |a limited appraisal may be performed when the appraiser invokes a USPAP provision that it calls the departure provision.|

| |Limited appraisals may only deviate from the requirements set forth for complete appraisals in specifically identified |

| |areas. See appraisal, complete appraisal and evaluation. |

|limited guaranty |A guaranty agreement that includes a statement that limits the guarantor's liability to the bank to a defined amount. |

|limited liability company |Legal entity that is a special kind of corporation. A limited liability company offers shareholders the limitations on |

| |personal liability that are available to stockholders in C or S corporations. At the same time, limited liability |

| |companies are taxed very much like partnerships; that is, the income is allocated to the stockholders for tax purposes. |

| |Generally, limited liability companies offer owners the same advantages of the more familiar S corporations but have |

| |fewer restrictions. |

|limited partnership |A partnership with at least one general partner and at least one, often more, limited partner(s). The general partner |

| |has unlimited liability for the debts of the partnership, but the limited partners are only liable to the extent of |

| |their investment in the partnership. |

|linear yield curve smoothing |The simple process of "drawing" straight lines to connect the knot points. The simplest but least accurate technique for|

| |yield curve smoothing. See smoothing. |

|line of credit |A type of credit facility. The specific meaning of the term varies from bank to bank. Since the various uses often cause|

| |confusion, two definitions are presented here. In this book, the second definition is used. |

| |(1) A type of loan that permits a borrower to draw funds, up to a specified maximum, for a defined period of time. |

| |Sometimes called a nonrevolving line of credit. |

| |(2) Any loan that permits the borrower to borrow funds up to a specified maximum, make repayments in any amount at any |

| |time, and obtain any number of readvances so long as the maximum is not exceeded. Sometimes called a revolving line of |

| |credit. The distinguishing feature of a line of credit is that it rebounds, which means that the amount borrowed can be |

| |paid down and reborrowed, or readvanced, as the borrower's needs change. |

|liquidity |Both the capacity and the perceived capacity to meet all obligations whenever due and to take advantage of business |

| |opportunities important to the future of the enterprise. The capacity and the perceived ability to meet known near-term |

| |and projected long-term funding commitments while supporting selective business expansion. |

|liquidity contingency risk |The risk that future events may require a materially larger amount of liquidity than the financial institution currently|

| |requires. One of the three primary components of liquidity risk along with mismatch liquidity risk and market liquidity |

| |risk. Also called prudential liquidity risk, funding risk or stand-by liquidity risk. Contingency risk arises from two |

| |closely related elements. See liquidity franchise risk and liquidity option risk. |

|liquidity franchise risk |The risk arising from the implied obligation of a bank to continue making new loans or other new business related cash |

| |flows in order to preserve its business franchise even though it may be having funding difficulties. One of two types of|

| |liquidity contingency risk. Also called liquidity-implied option risk. See liquidity contingency risk and liquidity |

| |option risk. |

|liquidity gap or liquidity gap risk |See liquidity mismatch. |

|liquidity in the ordinary course of |One of the three main types of liquidity-need environments. An institution's "going concern" need for liquidity. Funding|

|business |required for the normal ebb and flow of cash in the course of conducting bank business. Includes seasonal funding |

| |fluctuations. See bank-specific liquidity risk and systemic liquidity risk. |

|liquidity mismatch or liquidity mismatch|The expected amount of liquidity risk based on the mismatch between contractual amounts and dates for inflows and |

|risk |outflows. Also called funding gap, liquidity gap, or term liquidity risk. One of the three primary components of |

| |liquidity risk along with contingency risk and market liquidity risk. |

|liquidity option risk |The risk that actual cash flows will occur on dates or in amounts different from the contractual maturity dates and |

| |amounts. Put option risk includes the rights of saving, checking, and money market depositors to withdraw funds. It also|

| |includes the right of certificate of deposit (CD) holders to make early withdrawals. Call option risk includes the |

| |rights of line of credit borrowers to draw down on their committed lines of credit. One of the two types of liquidity |

| |contingency risk. See liquidity contingency risk and liquidity franchise risk. |

|liquidity preference |(1) A desire among some holders of financial instruments to keep some or all of their funds in liquid instruments, that |

| |is, instruments that either mature in a short period of time or that can be readily sold with small risk of loss. |

| |(2) A theory that attempts to explain the shape of yield curves. Under the liquidity preference hypothesis, the shape of|

| |yield curves is determined by the collective expectations of investors (the expectations hypothesis and implied forward |

| |rates) but with an upward bias at least for short- term rates caused by investors' preferences for liquidity. |

|liquidity premium |(1) The portion of a security's yield that is attributable to investors' desire to hold liquidity. |

| |(2) The difference or spread paid for liquidity. |

|liquidity reserves |The amount of unused capacity to meet unexpected reductions in funding or unexpected new funding requirements in the |

| |future. For much of the twentieth century, liquidity reserves were defined as primary reserves (cash and deposits due |

| |from banks) and secondary reserves (short-term, marketable investment securities). However, the term is used more |

| |broadly today. |

|liquidity risk |(1) For a financial institution, the risk that not enough cash will be generated from either assets or liabilities to |

| |meet cash requirements. For a bank, cash requirements are primarily made up of deposit withdrawals or contractual loan |

| |fundings. One of six risks defined by the Federal Reserve and one of nine risks defined by the Office of the Comptroller|

| |of the Currency (OCC). The OCC defines liquidity risk as the risk to earnings and capital arising from a bank’s |

| |inability to meet its obligations when they become due, without incurring unacceptable losses. The Federal Reserve uses |

| |a broad definition of liquidity risk as the potential that an institution (a) will be unable to meet its obligations as |

| |they come due because of an inability to liquidate assets or obtain adequate funding (referred to as "funding liquidity |

| |risk") or (b) cannot easily unwind or offset specific exposures without significantly lowering market prices because of |

| |inadequate market depth or market disruptions ("market liquidity risk"). |

| |(2) For a security, the risk that not enough interested buyers will be available to permit a sale at or near the |

| |currently prevailing market price. |

|liquidity stock |See liquidity reserves. |

|load |A sales charge paid by an investor in some mutual fund shares or annuities. The sales charge may be a front-end charge, |

| |a back-end charge, or a 12b-1 charge. Also, an expression used to describe a mutual fund that imposes sales charges on |

| |investors. The opposite of a no load mutual fund. See 12b-1 fee, back-end load and front-end load. |

|loan application register (LAR) |A document required by the Home Mortgage Discolure Act (HMDA) to gather information indicative of possible |

| |discrimiantion. Lending institituions are required to collect information on the sex, race and ethnicity of loan |

| |applicants. At the end of each calendar year, the lender must provide the loan application register to its primary |

| |regulator no later than March 1 of the following year. Once the information is analyzed and returned in the form of a |

| |disclosure statement, the lender must make the information available to the public at its home office and, if requested,|

| |at any branch location. |

|loan participation |An arrangement in which two or more lenders share in a loan to one borrower. |

|loan-to-value (LTV) ratio |The name used to refer to a credit analysis ratio that measures collateral coverage. To calculate the LTV ratio, the |

| |total amount of the borrower's obligations to the bank is divided by the total calculated value for the collateral. For |

| |example, if the total collateral value is estimated to be $1,000,000 and the total amount of the borrower's obligations |

| |to the bank is $800,000, then the LTV ratio is 0.80 or 80percent. |

|LOC |See letter of credit and line of credit. |

|local clearing house |An organization established by the banks in a local area to facilitate the presentment and exchange of checks between |

| |those banks. |

|local government investment pools |Commingled investment pools. The public sector equivalent of money market mutual funds. LGIPs are usually but not always|

|(LGIPs) |created by states for the benefit of their local governments. Sometimes these pools are managed by the states. |

|lockbox |(1) A cash management arrangement designed to reduce delays in depositing funds into the payee’s bank accounts. A post |

| |office box that is established by a bank to receive checks for its cash management customers. Lockboxes are utilized to |

| |accelerate deposits to the bank by eliminating internal processing by the payee organization. The bank need not maintain|

| |a separate post office box for each lockbox customer. Instead, it can sort mail received in a common box. |

| |(2) A secured lending control arrangement. Under this arrangement, the borrower's account debtors mail their payments |

| |into a post office box that is controlled by the bank. The funds are then applied by the bank to reduce a loan to the |

| |borrower that is secured by those accounts receivable. The bank need not maintain a separate post office box for each |

| |lockbox customer. Instead, it can sort mail received in a common box. |

|lock-in period |See call protection. |

|lockout |(1) A prohibition, usually, but not always, for a specified period of time. For example, a prohibition against |

| |prepayment of a loan. |

| |(2) The period of time before a REMIC investor will begin receiving principal payments. |

|LOCOM |See lower of cost or market. |

|london Interbank Bid Rate (LIBID) |The rate that a bank is willing to pay to acquire funds in the international interbank market. |

|london Interbank Offered Rate (LIBOR) |The rate the highest quality banks pay for Eurodollar deposits. There is a different LIBOR for each deposit maturity. |

| |LIBOR is commonly used as an index that represents short-term rates. |

|long |The position of an investor who owns, or commits to buy, a security in either the cash or futures markets. For example, |

| |the purchase of an interest rate future is a commitment to take delivery of securities at an agreed-on price on some |

| |future date. This is called a long futures position. Owning an investment security is a long cash position. |

|long bond |The term used to describe the most recent 30-year bond issue. Once the Treasury sells a new 30-year bond issue, that |

| |issue remains the long bond until the Treasury sells a subsequent issue. |

|long coupon |Sometimes bonds are issued with a bond date of greater than six months from the issue date. Coupons after the initial, |

| |long coupon are every six months. A long coupon reduces the effective yield-to-maturity by reducing the income that can |

| |be earned from reinvestment of the coupon. |

|lookback |The interval of time, or lag, between the date when an index value is established and the date when the payment rate |

| |and/or accrual rate is changed. |

|loss payee |A secured party to whom insurance proceeds are paid as stipulated in a loss payee clause of an insurance policy obtained|

| |by a debtor and covering property owned by a debtor and pledged to the secured party. Generally applies to personal |

| |property. |

|lower of cost or market (LOCOM) |The accounting practice of reflecting the value of an asset at the lower of its historical cost or market value. |

M

|macaulay duration |The earliest form of duration measurement. Developed in 1938 by Professor Frederick Macaulay, this simple form of |

| |duration provides only an approximate measure of the true price volatility and interest rate sensitivity of an |

| |instrument. See convexity, duration, effective duration and modified duration. |

|macro hedging |Hedging the net risk exposure of an entity’s entire portfolio or balance sheet. As opposed to micro hedging a single |

| |instrument. In interest rate risk management, macro hedging involves hedging the net mismatch or the net duration for |

| |the entire entity. |

|magnetic Ink Character Recognition |A description comprising numbers and symbols printed in magnetic ink on documents for automated processing. For checks, |

|(MICR) |this MICR line appears at the bottom of the check. |

|MAI |See Member Appraisal Institute. |

|mail float |The time it takes a remittance to move from the remitter to the recipient through the mail. This period can range from |

| |one to several days. Also called remittance float; however, remittance float can also result from electronic rather than|

| |mail delivery. |

|maker |See writer. |

|making a market |The conduct of a dealer who buys or sells at his or her bid and offered prices to ensure that there is a secondary |

| |market for other buyers or sellers. See market maker. |

|management letter |A document prepared by a firm’s auditors in conjunction with its annual audit. |

|management statements |Term used to describe financial reports prepared by the borrower with no assistance from independent, outside parties. |

|mandatory convertible securities |Types of convertible bonds that have required conversion or redemption features. One type of mandatory convertible |

| |requires the holder to exchange the bonds for common stock at maturity. Often used by banks seeking to meet regulatory |

| |capital requirements without issuing common stock until a later date. Often called equity-linked securities. These |

| |securities provide investors with higher yields to compensate holders for the mandatory conversion structure. They also |

| |typically have caps on the amount of upside potential that the security can achieve. For moderate stock increases, they |

| |will outperform the common stock due to the yield advantage, but the cap on the upside means that they lag stock |

| |performance for high stock returns. |

|margin, gross margin, net margin, |(1) An amount of cash or collateral that a buyer or borrower must provide in excess of value owed to that buyer or |

|security margin, variation margin |borrower by a seller, lender or depositor. Ensures performance by the buyer or borrower. Initial margin is posted at |

| |inception. Variation margin is the amount of any additional margin needed to correct deficiencies in the currently |

| |posted margin. |

| |(2) The amount by which the coupon rate for a floating- or variable- rate financial instrument differs from the defined |

| |index for that coupon rate. For example, if a floating-rate note requires that the coupon rate be set at 250 basis |

| |points above 30-day LIBOR, the gross margin is 250 basis points. Can also be the amount added to, or subtracted from, |

| |the index in determining the instrument's fully indexed rate. Investors in adjustable rate mortgage-backed securities |

| |(MBSs) receive a coupon rate that is lower than the fully indexed rate because the cost of servicing, the servicing |

| |spread, is deducted. The gross spread minus the servicing spread is called the net margin or the security margin. See |

| |index and servicing. |

| |(3) In a firm’s profit and loss statement, margin is the difference between sales price and the cost of goods sold. It |

| |may be expressed as a dollar quantity or as a percentage of the cost of goods sold. |

|margin loans |Loans acquired from brokers or financial institutions for the purpose of acquiring margin stock. |

|margin stock |A term defined by the Federal Reserve Board of Governors in Regulations T and U. Any stock listed on a national |

| |securities exchange, any over-the-counter security approved by the SEC for trading in the national market system, or any|

| |security appearing on the Board's list of over-the-counter margin stock and most mutual funds. There are certain |

| |requirements a stock must meet before it can be margined. The most important of which is that the price must be greater |

| |than five dollars. |

|marginal rate |The incremental rate or return realized by making just one change, adding a single additional unit, or deleting a single|

|marginal return |unit. For example, if one more new loan is added to an existing portfolio, and the yield on that loan is 10%, the |

| |marginal yield for the portfolio is 10%. Not the same as the average. |

|mark to market |The process of restating the carrying value of an asset or liability to equal its current market value. Under FAS 115, |

| |financial instruments held in trading accounts must be marked to market by increasing income to reflect unrealized gains|

| |or by decreasing income to reflect unrealized losses. Financial instruments categorized as available-for-sale (AFS) |

| |under FAS 115 must also be marked to market but receive different accounting treatment. |

|market depth |A term used to describe the characteristic of a secondary market for a financial instrument evidenced by more than a |

| |minimal amount of active daily trading. One of the requirements for readily marketable assets. |

|market liquidity risk |The potential that an institution cannot easily unwind or offset specific exposures, such as investments held as |

| |liquidity reserves, without incurring a loss because of inadequate market depth or market disruptions. One of the three |

| |primary components of liquidity risk along with mismatch liquidity risk and liquidity contingency risk. |

|market maker |An individual or entity that stands ready to buy or sell financial instruments at all times. Market makers quote both a |

| |bid and an offer price to the market. Market makers provide liquidity to markets. They profit from the spread between |

| |bid and offer prices as well as from changes in market prices. Market makers adjust their bid or offer prices depending |

| |upon positions that they hold and/or upon their outlook for changes in prices. |

|market risk |One of six risks defined by the Federal Reserve. The risk of an increase or decrease in the market value/price of a |

| |financial instrument. Market values for debt instruments are affected by actual and anticipated changes in prevailing |

| |interest rates. Market values for all financial instruments, except direct obligations of the U.S. Treasury, are |

| |affected by either actual or perceived changes in credit quality. Market risk includes reinvestment risk - that is, the |

| |risk that all or part of the principal may be received when interest rates are lower than when the security was |

| |originally purchased. In that case, the principal must be reinvested at a lower rate than that originally received. |

| |Sometimes called market value risk. Also see interest rate risk and price risk. |

|market thickness |See market depth. |

|market value |The value of a financial instrument based upon the price at which a financial instrument is purchased or sold or the |

| |price at which it could presumably be purchased or sold. For an equity instrument, the product of the number of shares |

| |times the market price. For a debt instrument, the product of the par or current face times the market price. |

|market value of portfolio equity (MVPE) |The difference between the sum of the present values of all cash flows from assets and the sum of the present values of |

| |all cash flows from liabilities. In other words, the market value of the institution’s capital account. Defined by the |

| |Office of Thrift Supervision (OTS) to represent the difference between the market value of a financial institution’s |

| |assets and liabilities plus or minus the value of any off-balancesheet positions. This is a proxy or estimate used for |

| |capital when the sensitivity of capital to changes in prevailing interest rates is calculated. As used by thrift |

| |institutions and the OTS, the term has been replaced by "net portfolio value" or NPV. As used by bankers and banking |

| |regulators, the term is slowly being replaced by "economic value of equity" or EVE. See net economic value and value at |

| |risk. |

|market value simulation |The process of generating multiple forecasts for future interest rate scenarios and then discounting the estimated cash |

| |flows anticipated under those rate scenarios. The results of market value simulation are a range of forecasted market |

| |values of equity for both current and potential rate risk exposures. Comparisons of these forecasted MVPE values reveal |

| |the sensitivity of MVPE to changes in rates. |

|marketable, marketability |An attribute that may or may not be associated with a security. A security is considered to be marketable if it is |

| |readily salable to buyers in an active secondary market. As defined by the Office of the Comptroller of the Currency |

| |(OCC) (12 CFR 1), marketable means that the security: |

| |(1) Is registered under the Securities Act of 1933,15 USC 77a et seq.; |

| |(2) Is a municipal revenue bond exempt from registration under the Securities Act of 1933, 15 USC 77c(a)(2); |

| |(3) Is offered and sold pursuant to Securities and Exchange Commission Rule 144A,17 CFR 230.144, and rated investment |

| |grade or is the credit equivalent of investment grade; or |

| |(4) Can be sold with reasonable promptness at a price that corresponds reasonably to its fair value. |

|master agreement |(1) Securities A written contract covering all future transactions between the parties to repurchase/reverse repurchase |

| |agreements and establishing each party's rights in the transactions. A master agreement often will specify, among other |

| |things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the |

| |seller-borrower. |

| |(2) Derivatives. See ISDA master agreement. |

|match fund or matching |An entity is said to match fund a loan or investment when it acquires a liability in equal amount for the same maturity.|

| |However it is not perfectly match funded unless all of the interest and principal cash flows and any prepayment options |

| |are also the same for the asset as they are for the liability. |

|match maturity funds transfer pricing |A funds transfer pricing system or methodology that assigns a cost of funds to assets and a credit for funds to |

|(MMFTP) |liabilities that reflect the interest rate risk - especially the rate risk associated with the time remaining to |

| |maturity - in those assets or liabilities. See funds transfer pricing. |

|matched trade |A trade that is mirrored by an equal and offsetting trade with a different counterparty. In a matched trade, the |

| |interest rate, market, and price risks are offset but not the credit risk. The trading entity incurs credit risk for the|

| |counterparties on each side of the trade. |

|materialman's lien |A lien against real property created under state laws that give a person who supplies materials used to repair or |

| |improve real estate the right to place a lien against the property if that person is not paid. |

|maturity band |The remaining time to maturity calculated as the time between the execution date of a trade and the maturity. |

|maturity date |The date a financial instrument's contractual term expires. The date on which the principal or last principal payment on|

| |a debt is due and payable. For mortgage-related securities, see final distribution date and final maturity. |

|maturity ladder |See laddered maturities. |

|maturity transformation |The term economists use to describe the activity of a financial intermediary that accepts deposits or investments of one|

| |term (usually short) and places those funds with a debtor in another term (usually intermediate or long term). |

|maximum forward rate smoothing |An alternative yield curve smoothing technique. The most accurate yield curve smoothing method for forward rates. The |

| |yield curve with the smoothest possible forward rate function, consistent with observable data, is closely related to |

| |but significantly different from the popular cubic spline approach to the smoothing of both yields and discount bond |

| |prices. The yield curve which produces the smoothest possible forward rates consistent with given zero coupon bond |

| |prices has a quartic forward rate function which spans each time interval between observable data points. This contrasts|

| |with the cubic polynomial that is used to fit either yields or discount bond prices in the cubic spline approach. This |

| |method produces the smoothest possible forward rate curve (with f’=0 at the longest maturity) that causes the |

| |interpolated yield curve to be totally consistent with the observable data. See smoothing. |

|MBS |See mortgage-backed security. |

|mean reversion |The behavior of a variable in which the values for that variable move towards the long-run average value for that |

| |variable. |

|mechanic's lien |A lien against real property created under state laws that give a person who makes repairs or improvements to real |

| |estate the right to place a lien against the property if that person is not paid. |

|medium-term notes (MTNs) |Debt instruments with maturities ranging from 9 months to 30 years that are offered on a continuous basis. Offered on a |

| |continuous basis means that they are issued and sold as buyers request them rather than on a single issue date. MTNs |

| |have features similar to corporate bonds. Bank deposit notes are a form of MTNs. |

|megapool |FNMA MBSs created when older pools that have been reduced to small outstanding balances (i.e., low current face) as a |

| |result of cumulative prepayments are combined to create new securities with larger remaining balances. |

|member Appraisal Institute (MAI) |A designation earned by qualifying commercial real estate appraisers. It is awarded by the Appraisal Institute. |

|meta data |Data about data. A term used in database management and data warehousing. |

|metes and bounds |A name for a type of property description used to identify parcels of land for which the legal identification is |

| |expressed in surveying terms. "Metes" means measurements and "bounds" means boundaries. A metes and bounds description |

| |gives the length and direction of the boundaries of a property. |

|mezzanine financing |Financing wherein the junior debt in a leveraged buyout comes from a lender willing to take a subordinate position. See |

| |leveraged buyout. |

|MICR |See magnetic ink character recognition. |

|micro hedging |Hedging the interest rate risk exposure of a single asset or liability. See macro hedging, its converse. |

|midget |Government National Mortgage Association (GNMA) issued pools of fixed-rate mortgages with original maturities of 15 |

| |years. |

|minimum pension liability |A term used to describe a liability for underfunded pension obligations that FAS 87 required firms to recognize as an |

| |actual balance sheet liability. The minimum pension liability is the excess of accumulated vested and nonvested plan |

| |benefits over plan assets. FAS 130 establishes accounting requirements for adjustments to minimum pension liability. |

|mismatch |Used in asset/liability management to describe the difference between rate-sensitive assets and rate-sensitive |

| |liabilities in rate gaps or between cash inflows and outflows in liquidity gaps. See gap. |

|mismatch risk |(1) The risk that a financial institution will suffer either a decline in income or capital because future changes in |

| |prevailing interest rates impact assets more or less than they impact liabilities. The component of interest rate risk |

| |arising from differences in the timing of asset and liability repricing. Also called gap or repricing risk. |

| |(2) The risk that a financial institution will suffer either a decline in income or capital because of future funding |

| |problems. The component of liquidity risk arising from differences in the timing of cash inflows and outflows. Also |

| |called liquidity gap or liquidity mismatch risk. |

|MMDA |See money market deposit account. |

|MMFTP |See match maturity funds transfer pricing. |

|model risk |The risk that incorrect or sub-optimal interest rate risk management decisions will be made because of errors in the |

| |model used to measure risk exposure. Errors may arise from inaccurate data input into the model, from inaccurate |

| |assumptions used in the simulation, and/or from errors in model logic or programming. |

|modified American option |See Bermuda option. |

|modified duration |Macaulay duration adjusted for compounding. The figure for Macaulay duration is divided by the sum of one plus the rate |

| |divided by the number of compounding periods per year. A more accurate measure of the weighted average time remaining |

| |until receipt of a series of cash flows. In essence, modified duration is a measurement of price and interest rate |

| |sensitivity. (Economists refer to this as price elasticity.) Modified duration expresses the percentage change in the |

| |value of an instrument for each one percentage point change in prevailing interest rates. See convexity, duration, |

| |effective duration, Macaulay duration, negative duration and positive duration. |

|modified gap |A term used to describe a variety of gap analysis methodologies that make modifications to contractual gap analysis in |

| |an effort to improve the accuracy of the gap analysis. See beta-adjusted gap and dynamic gap. |

|money laundering |The conversion or transfer of property derived from a criminal offense for the purpose of concealing, or disguising, the|

| |illicit origin of the property, or of assissting any person who is involved in the commission of such an offense, to |

| |evade the legal consequences of the action; the concealment or disguise of the true nature, source, location, |

| |disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from a |

| |criminal offense. |

|money market |The aggregation of buyers and sellers actively trading money market instruments. |

|money market deposit account (MMDA) |A bank deposit account designed to pay a higher rate of interest to depositors than might otherwise be earned in |

| |checking or savings accounts. Money market deposit accounts do not have specified maturities. Their rates are |

| |administered by the bank although they are influenced by prevailing rates for money market instruments traded in capital|

| |markets. Some banks index the rates that they pay on MMDAs to rates paid for traded money market instruments such as |

| |U.S. Treasury bill rates. Federal regulations limit the number of transactions that can be made from these accounts. |

|money market fund |A form of mutual fund that restricts investments to relatively safe, relatively short-term instruments. Typical money |

| |market funds may invest in short-term U.S. government obligations, commercial paper, and banker’s acceptances. Average |

| |maturities of fund assets are typically 14 to 28 days. The income, less costs, is paid out every day so that the share |

| |value is always the same. However, shareholders are not protected against loss from the fund's investments. |

|money market instrument |The broadest definition of a money market instrument is a short-term debt instrument that is purchased from a broker, |

| |dealer, or bank. Sometimes the term "money market" is used more restrictively by further defining short-term to mean an |

| |instrument with no more than 12 months remaining from the purchase date until the maturity date. (The remaining life of |

| |the instrument is the basis for the definition rather than the its original term.) Sometimes money market is used more |

| |restrictively to mean only those instruments that have active secondary markets. Definitions of money market instruments|

| |that only include instruments with active secondary markets exclude non-negotiable investments such as most bank |

| |certificates of deposit. |

|money market mutual fund |See money market fund. |

|money market rate |In asset/liability management, the phrase money market rate is used to distinguish a rate set in actively traded markets|

| |from a rate that is administratively set by banks or other financial institutions. Rates on short-term U.S. Treasury |

| |notes and the London Interbank Offered Rate (LIBOR) are the most common money market rates. However, any actively |

| |traded, short-term, high-quality instrument might be considered to be a money market instrument. |

|Monte Carlo method |A statistical technique that involves using a large number of repeated calculations. A methodical and formalized version|

| |of trial and error. |

|Monte Carlo simulation |A statistical technique that involves using a large number of repeated calculations. A methodical and formalized version|

| |of trial and error. Monte Carlo simulation uses historically known interest rate volatilities to scientifically generate|

| |the large number of interest rate paths needed to simulate the interest rate sensitivity of bank products with embedded |

| |options. Monte Carlo simulation is one of the best tools for dealing with many of the option-related problems in |

| |interest rate risk measurement. |

|moral obligation bond |Revenue bonds issued by state agencies, government commissions, or other special purpose municipal entities that purport|

| |to have the added backing of a moral obligation of the city or state government. Since there is no legal obligation for |

| |the state or city to back the principal or interest due on these bonds, the moral obligation provides limited, if not |

| |dubious, support. |

|mortgage |(1) noun — A legal instrument that creates a lien upon real estate for the purpose of securing a debt. The instrument is|

| |executed by a lender and a borrower or guarantor as collateral for the payment of a debt that creates a lien on real |

| |estate owned by the borrower or guarantor. The borrower or guarantor is called the mortgagor and the lender is called |

| |the mortgagee. In some states, a different legal instrument called a deed of trust fulfills a similar function even |

| |though it is not legally the same. See chattel mortgage. |

| |(2) verb — The action of granting a lien to pledge real property as security for the repayment of a debt. |

|mortgage bonds |A common type of secured corporate bond. The bond indenture for mortgage bonds, along with associated documents executed|

| |by the issuer, provides for the bondholders to have, through the trustee, an interest in real property collateral. For |

| |example, the bonds may be secured by a mortgage on real estate used by the company. This may be the case when the bond |

| |proceeds are used to finance the construction of a factory or plant. (Many pollution control and utility bonds are |

| |mortgage bonds.) It is important to understand that the mortgage is not the sole, or even the primary, backing for the |

| |repayment of these bonds. These debts are still financial obligations that the firm must repay even if the value of the |

| |collateral falls. |

|mortgage constant |Percentages that are an expression of the total interest and principal payments that must be made each year to fully |

| |amortize a loan over a specified number of years using level payments. |

|mortgage loan |A loan secured by a mortgage. In the mortgage-backed securities industry, loans secured through deeds of trust are also |

| |referred to as mortgage loans. |

|mortgage note |A name used to describe a promissory note that is secured by an interest in real property. Mortgage notes generally, but|

| |not always, call for mostly regular, periodic payments of principal and interest. |

|mortgage pass-through |The simplest and oldest type of MBS. A pass-through is a security that provides its owners with a pro rata claim to all |

| |of the cash flow generated from a pool of mortgage loans. |

|mortgage REIT |See real estate investment trust. |

|mortgage-backed security (MBS) or |Securities composed of, or collateralized by, loans that are themselves collateralized by liens on real property. MBSs |

|mortgage-backed bond |can be categorized into two major types. Pass-through pools are mortgage-backed bonds created by assembling a pool of |

| |similar mortgage loans into a single security. Investors in a pass-through pool receive a portion of every interest and |

| |principal payment (less serving charges) that is equivalent to the investor’s pro rata ownership share in the pool. The |

| |other major type is collateralized mortgage obligations (CMOs), usually real estate mortgage investment conduits |

| |(REMICs). Investors in a CMO own the rights to receive cash flow from an underlying pool of mortgages in a predetermined|

| |order based on priority. CMO securities are secured by pass-through pools. Both types of MBSs may be backed by either |

| |liens on residential or commercial properties; however, residential mortgages are more common. Both types of MBSs may be|

| |issued by either government agencies or private issuers; however, those issued by government agencies are more common. |

| |See pass-through, collateralized mortgage obligation and real estate mortgage investment conduit. |

|mortgagee |A secured party to whom insurance proceeds are paid as stipulated in a mortgagee payee clause of an insurance policy |

| |obtained by a debtor and covering property owned by a debtor and pledged to the secured party. Generally applies to real|

| |property. |

|mortgagee clause |A provision in a hazard insurance contract stipulating that in the event of a loss, proceeds will be paid to a secured |

| |party. Usually used when the insured property is real property. Includes personal property that is insured as contents |

| |of the insured real property. The term mortgagee clause may be used to refer to all such insurance policy stipulations. |

| |However mortgagee clauses are technically not as broad as a similar insurance policy stipulation called a standard |

| |mortgagee clause. See standard mortgagee clause. |

|mortgagee waiver |A document obtained by some secured lenders with a collateral interest in property covered or potentially covered by a |

| |mortgage granted to a different lender. For example, if Bank B is taking a security interest in large equipment that |

| |might be deemed to be fixtures covered by a mortgage held by Bank A, Bank B may request a mortgagee waiver from Bank A. |

| |May also be used when a tenant is granting its lender a security interest in property that might be deemed to be |

| |fixtures subject to a mortgage granted by the landlord to its lender. |

|MTNs |See medium-term notes. |

|municipal derivatives |Synthetic securities created from municipal securities. Variable-rate, short-term securities are, for example, created |

| |from long-term, taxable municipals when remarketing agents add a series of put options, the backing of a letter of |

| |credit, and an agreement to pay interest at rates that vary weekly, monthly, quarterly, or semiannually. |

|MVPE |See market value of portfolio equity. |

N

|NACM |Acronym for National Association of Credit Managers. |

|naked |The position of an option holder who does not also own an offsetting position in the underlying. For example, an |

| |investor who sells a call option but who does not own the underlying instrument that can be called has a naked call |

| |option or a naked call position. Also called uncovered. The opposite of covered. |

|NALMA |Acronym for the National Asset and Liability Management Association. |

|National Association of Securities |An association of broker/dealers. The association supervises and regulates the trading and the conduct of its member |

|Dealers (NASD) |organizations and the licensed brokers who work for those member organizations. The NASD was created under the |

| |Securities and Exchange Act of 1934. Even though it is not a government organization, it works closely with state and |

| |federal securities regulators. |

|National Council on Government |Prior to 1984, this group and its predecessor organization were responsible for setting generally accepted accounting |

|Accounting (NCGA) |principals for state and local governments. |

|National Flood Insurance Reform Act |A Federal law that establishes requirements for flood insurance. Under the National Flood Insurance Reform Act of 1994, |

| |lenders taking an interest in real property are required to complete a standard flood hazard determination form |

| |developed by the Federal Emergency Management Agency (FEMA). Flood hazard forms must be retained in the lender’s |

| |records. If the form indicates that the property is in a designated flood hazard zone, the lender is required to have |

| |flood insurance protection. Lenders may also have notice requirement obligations for collateral located in flood hazard |

| |zones. |

|natural hedges |Balance sheet hedge activity done by altering asset and/or liability repricing characteristics or volumes to reduce the |

| |entity's interest rate risk exposure without purchasing derivative hedge instruments such as interest rate swaps or |

| |futures. The opposite of natural hedging is capital markets or derivatives hedging. Note that some bankers use the term |

| |"natural hedges" more narrowly than others. As narrowly defined, a natural hedge is one in which the rate risk in one |

| |piece of customer business is offset by the rate risk in another piece of customer business. Thus a hedge involving the |

| |investment portfolio is not a natural hedge under the most narrow definition of the term. |

|NCGA |See National Council on Government Accounting. |

|negative amortization |The increase in a loan balance resulting from a situation in which the payments due from the borrower are not sufficient|

| |to cover the full amount of the interest due. The amount of interest due that is not covered by the amount of the |

| |payment is added to the unpaid principal balance of the loan. Negative amortization typically occurs during periods of |

| |high interest rates for loans with floating interest rates but fixed monthly payments. |

|negative convexity |A phrase use to describe a particular type of instability in the duration of an instrument. Negative convexity means |

| |that as yields rise, duration rises and as yields fall, duration falls. Graphically, this is seen as a price/yield curve|

| |for which the price at very low and very high yields is less than the price indicated by a straight, tangent line. For |

| |an instrument with negative convexity, duration understates the interest rate sensitivity. If convexity is low, that is,|

| |if the price/yield relationship is close to a straight line, duration is stable. If convexity is high, duration is |

| |unstable. The greater an instrument's convexity, the less accurate duration will be. Callable bonds, loans, and |

| |mortgage-backed bonds typically have negative convexity. |

|negative correlation |See correlation. |

|negative covenant |A provision in the lender's documents that prohibits the borrower from doing something in the future. For example, a |

| |provision prohibiting the borrower from acquiring additional debt during the term of the loan. |

|negative duration |(1) The name for a particular relationship between changes in the price of a debt security and changes in prevailing |

| |interest rates. When a security has negative duration, its price decreases in response to a decrease in prevailing |

| |market rates. Very few securities have negative duration. Note that the term "duration," as used in this definition, |

| |refers to modified duration. See convexity, duration and positive duration. |

| |(2) For a financial institution, a situation in which the total duration of its assets is shorter than the total |

| |duration of its liabilities. In such cases, the duration of equity is negative. In other words, an entity with |

| |short-term assets funded by long-term liabilities will have a negative duration of equity. A financial institution that |

| |has a negative duration of equity may also be described as having a positive gap or as being asset sensitive. The |

| |theoretical equity value, but not necessarily the stock price, of a financial institution with a negative duration of |

| |equity will decrease if rates decline and increase if rates rise. Note that the term "duration," as used in this |

| |definition, refers to modified duration. See convexity, effective duration, Macaulay duration and modified duration. |

|negative gap |A term referring to a liability-sensitive condition. A mismatch in which interest-sensitive liabilities exceed |

| |interest-sensitive assets. |

|negative pledge |A document or a provision in a document in which a borrower agrees not to give any creditor a security interest in |

| |identified property owned by the borrower. |

|negative response verification |A form of auditing account balances in which the account debtor is only requested to respond if the balance owed is not |

| |the same as the amount shown on the confirmation letter. One of two forms of direct verification. |

|negative sloping yield curve |See yield curve slope. |

|negotiable |Salable. |

|negotiable Order of Withdrawal (NOW) |The name of an interest-bearing checking account that banks are permitted by regulation to offer to certain customers. |

|net asset value (NAV) |A mutual fund’s share value. It is calculated by subtracting total liabilities from total assets to determine net worth |

| |or equity. The equity value is then divided by the number of outstanding shares. The NAV is calculated once each day at |

| |the close of business. |

|net economic value |Term favored by the Federal Banking regulators in lieu of market value of portfolio equity. The difference between the |

| |sum of the present values of all cash flows from assets and the sum of the present values of all cash flows from |

| |liabilities. This is a proxy or estimated value used for capital when the sensitivity of capital to changes in |

| |prevailing interest rates is calculated. See market value of portfolio equity and value at risk (VAR). |

|net interest margin |The amount of interest income minus interest expense, usually expressed as a percentage. The net interest margin |

| |percentage is calculated by dividing interest income less interest expense by average earning assets. If interest income|

| |includes tax-free income, that income should be "grossed up" to its taxable equivalent before calculating the |

| |percentage. (To gross up tax-free income to its taxable equivalent, divide the income by one minus the marginal income |

| |tax rate.) The net interest margin expressed as a percentage of earning assets is often confused with the net spread. |

| |The spread is the difference between the average rate earned on assets minus the average rate paid on liabilities. That |

| |spread would only equal the net interest margin percentage if the dollar amount of earning assets equaled the dollar |

| |amount of interest-bearing liabilities. |

|net lease |Leases that require the lessee to pay expenses. For real estate leases, see triple net. For personal property leases, a |

| |net lease is a lease that requires the customer/lessee to pay for the insurance, maintenance, and all taxes, if any, |

| |levied on the equipment. |

|net margin |See margin. |

|net noninterest expense |Total noninterest expense minus total noninterest income. A measure used by financial institutions to monitor the extent|

| |to which fees and other sources of noninterest income offset noninterest expenses. For a financial institution, expenses|

| |other than interest expense are almost always much larger than income other than interest income. Also called net |

| |overhead. Often expressed as a percentage of average earning assets. See noninterest income and noninterest expense. |

|net overhead |See net noninterest expense. |

|net portfolio value |A term used by the Office of Thrift Supervision to refer to a proxy value for an institution’s capital when the rate |

| |sensitivity of capital is measured. See market value of portfolio equity and net economic value. |

|net sales |Term used to describe a firm's revenue after the amount of returns, allowances, and discounts is deducted from gross |

| |revenue from the firm's principal operations. |

|net settlement |(1) For groups of financial transactions between the same counterparties, the settlement of a group of monetary |

| |transactions by delivery of only the net amount due. |

| |(2) For derivatives, a type of arrangement between two counterparties to a financial transaction in which the parties |

| |exchange value without the delivery of the full value or an asset. FAS 133 defines net settlement to be the case in |

| |which neither party is required to deliver an asset that is associated with the underlying. This is the case in which a |

| |net amount of interest is exchanged between the parties based upon some notional amount that is not exchanged. See |

| |notional amount and underlying. |

|NEV |See net economic value. |

|next-day settlement |The agreement of a buyer and seller to exchange the security and the payment on the first business day after the trade |

| |date. See settlement. |

|NIAT |Acronym for net income after income taxes. |

|NIBT |Acronym for net income before income taxes. |

|nickel |An informal name for 5 basis points. |

|no-load |An expression used to describe a mutual fund that does not impose any sales charges on investors. The term "no-load" |

| |fund is sometimes used to describe a fund without either a front-end charge or a deferred sales charge but which may |

| |nevertheless have a 12b-1 charge. However, a true no-load fund is one without any sales charges at all - front-end, |

| |deferred or 12b-1. See 12b-1 fee, back-end load and front-end load. |

|no-lien contract |In real estate construction, this is a contract in which the subcontractors agree to give up their rights to file |

| |mechanic’s or materialman's liens. |

|nonappropriation clause |A provision in some municipal leases. The clause provides that the lease terminates without penalty to the lessee in the|

| |event that the municipal lessee fails to appropriate sufficient funds to make required lease payments during the ensuing|

| |annual or biannual budget period. Usually, this clause is only used in states where legal restrictions apply to the |

| |quantity of or to the approval process required for municipal debt. The nonappropriation clause is intended to avoid |

| |characterization of the lease as debt subject to such restrictions. This clause is almost always used in conjunction |

| |with a nonsubstitution clause. |

|nonconsumer deposit account |A demand, time, savings, passbook, or similar deposit account maintained with a bank, credit union, or other financial |

| |institution that is used primarily for business purposes. A category of personal property collateral defined by the 2001|

| |revisions to Article 9 of the Uniform Commercial Code. |

|nondisturbance agreement |An agreement used in some commercial mortgage loans that are secured by interests in real estate leased to tenants. In a|

| |nondisturbance agreement, the lender promises the tenant that in the event of foreclosure, the lender will not cancel |

| |the tenant’s lease. Often, lenders have to give nondisturbance agreements to tenants in order to induce the tenants to |

| |provide the lender with subordination and attornment agreements and/or tenant estoppel letters. |

|non-gnome |Fifteen-year FHLMC MBS pools that are issued under the FHLMC 15 year-Guarantor Program. See gnome. |

|noninterest expense |For a financial institution, operating expense from sources other than interest expense. The main components of |

| |noninterest expense are usually personnel, occupancy, equipment, and professional services. |

|noninterest income |For a financial institution, operating income from sources other than interest income. The main components of |

| |noninterest income are fees such as deposit service charges, funds transfer fees, trust fees, brokerage fees, etc. |

|non-notification |Receivable lending in which the borrower's account debtors are not notified of the bank's lien. (The bank may use |

| |non-notification lending but still have a provision in the loan document that allows the bank to switch to |

| |notification-based financing in the event of a default.) Under non-notification financing arrangements, payments may be |

| |sent directly to the bank by the account debtors. |

|nonpossessory agricultural lien |An interest other than a security interest in farm products that secures payment or performance of an obligation for |

| |goods or services furnished in connection with a debtor’s farming operation. Arises primarily through the furnishing of |

| |goods and services or leased property that are connected with a debtor’s farming operation. |

|nonsubstitution clause |A provision in some municipal leases. This lease provision stipulates that if the municipal lessee terminates the lease |

| |under a nonappropriation clause, the lessee will not use any other property performing a similar function to that |

| |performed by the property covered by the lease for the period of time covered by the lease. The nonsubstitution clause |

| |is intended to be a deterrent to termination of the lease contract under a nonappropriation clause. |

|notice of adverse action |In many cases, lenders are required by law to provide applicants with timely notice of adverse action, such as denial of|

| |credit applications. This requirement applies to some loans covered by the Equal Credit Opportunity Act and to some |

| |loans covered by the Women’s Business Ownership Act. |

|notification |Receivable lending with the requirement that the borrower's account debtors must be notified of the bank's lien. The |

| |payments on the accounts are then usually sent directly to the lender by the account debtors. Sometimes called |

| |notification plan. |

|notional amount |The principal amount or face value of a derivative. Defined by the Financial Accounting Standards Board (FASB) in FAS |

| |133 as the number of currency units, shares, bushels, pounds or other units specified in a derivatives contract. The |

| |notional amount is used to calculate the payments that are exchanged by the counterparties in the transaction. Market |

| |participants refer to notional principal because, unlike bonds or other conventional credit instruments, these types of |

| |derivatives do not involve an exchange of principal. Rather, the parties state the principal amount only as a basis for |

| |calculating the sizes of the interest related payments that they exchange. In this application, principal is only a |

| |reference point or idea - hence the term. Also called the notional principal balance. |

|notional principal |See notional amount. |

|novation |(1) The substitution of an existing debt with a newer debt. |

| |(2) An agreement to substitute an existing party to a contract with a new party. All of the original parties to the |

| |contract must agree to the substitution. |

|NOW |See Negotiable Order of Withdrawal. |

|now account | |

|NRSRO |Acronym used by the Securities Exchange Commission (SEC) and by banking and securities regulators to refer to nationally|

| |recognized statistical rating organizations. The most well known NRSROs are Standard & Poor’s and Moody’s. |

O

|OAS |See option-adjusted spread. |

|obligor |Any party with an obligation to discharge; usually used to refer to a borrower. |

|OCC |See Office of the Comptroller of the Currency. |

|off-balance sheet |A term used to describe contingent liabilities, contingent assets, and commitments that are legally binding but are not |

| |assets or liabilities shown on the balance sheet under GAAP. Examples include loan commitments and letters of credit. |

|off-the-run |A term used to describe all but the most recently issued treasury or agency securities in a particular maturity class. |

| |For example, at any given time, there may be a number of U.S. Treasury security issues with remaining lives of about two|

| |years. The most recently issued two year securities are described as on-the-run. All the rest are described as |

| |off-the-run. Off the run securities trade at wider spreads than similar securities that are actively quoted or traded. |

| |They may also trade at slightly lower prices(higher yields). |

|offer or offered price |The trading price proposed by the prospective seller of securities. Also called the asked or asking price. |

|Office of the Comptroller of the |Part of the U.S. Treasury department. The OCC is the primary regulator for banks with national charters. |

|Currency (OCC) | |

|Office of Thrift Supervision (OTS) |The OTS regulates federally insured savings and loan institutions. One of the provisions of the Financial Institutions |

| |Reform, Recovery, and Enforcement Act (FIRREA) established the OTS to replace the Federal Home Loan Bank Board as the |

| |primary thrift regulator. |

|OID |See original-issue discount. |

|on-the-run |A term used to describe the most recently issued treasury or agency securities in a particular maturity class. For |

| |example, at any given time, there may be a number of U.S. Treasury security issues with remaining lives of about two |

| |years. The most recently issued two year securities are described as on-the-run. (All the rest are described as |

| |off-the-run.) On the run securities trade at narrower spreads than similar securities that are less actively traded. |

| |They may also trade at slightly higher prices(lower yields). |

|on-us items |Checks or drafts drawn on the same bank that is used by the payee/drawee to cash the check or deposit the proceeds. |

| |Checks or drafts payable to the drawor’s bank itself, as opposed to checks drawn on other institutions. |

|one-factor model |A simple financial model where the future price of an instrument is the single variable or unknown. One-factor models, |

| |such as Black-Scholes or Vasicek, usually lead to closed form solutions. See closed form solution. |

|open-end credit |Types of credit extensions that permit borrowers to add to the amount borrowed, usually in irregular amounts, at various|

| |times subsequent to the granting of the credit. Examples include credit card loans, personal lines of credit, and home |

| |equity lines of credit. |

|open market activities |The purchase or sale of government securities conducted by the Federal Reserve Bank of New York acting upon instruction |

| |from the Federal Reserve Board of Governors. Used to decrease the money supply when bonds are sold and the purchase |

| |funds paid the Fed are taken out of circulation or increase the money supply when newly created cash is used to buy |

| |securities. The changes in the money supply impact short-term interest rates and through that mechanism are the primary |

| |monetary tool of the FRB. |

|open repo |See continuous repo. |

|operating expense ratio |A ratio used in real estate lending analysis. The ratio is the total operating expenses divided by the effective gross |

| |income. |

|operating income |An income statement subtotal that is variously called operating income or operating profit. Gross profit minus operating|

| |expenses. A credit balance here, shown as a positive number, indicates that the firm makes money on its principal |

| |operations. . A debit balance, shown as a negative number, indicates that the firm loses money on its principal |

| |operations. |

|operating lease |See lease. |

|operational efficiency |A term used to describe the characteristic of a secondary market for a financial instrument evidenced by low transaction|

| |costs and smooth execution of trades. The spread between bid and offered prices, brokerage commissions, and taxes are |

| |the three main types of transaction costs. One of the requirements for readily marketable assets. |

|operations risk |The risk to the bank that errors made in the course of conducting its business will result in losses. The Federal |

|operational risk |Reserve calls this operational risk and states in its definition that operational risk arises from the potential that |

| |inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes |

| |will result in unexpected losses. The Office of the Comptroller of the Currency calls this transaction risk and defines |

| |it as the risk to earnings or capital from problems with service or product delivery. Operations risk is covered under |

| |Basel II pillar I. |

|opinion letter |Letter issued by a certified public accountant to accompany financial statements. The opinion letter has two parts. One |

| |describes the scope of the accountant’s work in the preparation and testing, if any, related to the preparation of the |

| |financial reports covered by the letter. The other provides the accountant’s opinion regarding the fairness, accuracy, |

| |and conformity with GAAP of the financial statements. Accountant’s opinions are categorized as unqualified, qualified, |

| |disclaimer, or adverse depending upon the nature of the comments in the letter. See adverse opinion, disclaimer opinion,|

| |qualified opinion and unqualified opinion. |

|opportunity cost |The cost of pursuing one course of action measured in terms of the foregone return that could have been earned on an |

| |alternative course of action that was not undertaken. |

|option |(1) A contract that gives its holder the right, but not the obligation, to buy or sell an underling security, commodity,|

| |or currency before a certain date. Options are often used in hedging. Put options give the holder the right to sell the |

| |underlying security, commodity, or currency at the strike price. Call options give the holder the right to buy the |

| |underlying security, commodity or currency at the strike price. |

| |(2) A provision in a financial contract that gives one party to the contract one or more rights to change the maturity, |

| |the principal amount, the interest rate, or other contract term. In loans, the most common form of option risk arises |

| |from a borrower’s right to prepay. In securities, the most common form of option risk arises from an issuer’s right to |

| |call the security. See embedded option. |

|option-adjusted duration |A duration measure that does allow for changes in cash flows as yields change A variation of effective or empirical |

| |duration. Option adjusted duration incorporates the expected duration-shortening effect of an issuer's embedded call |

| |provision. It is also called adjusted duration. |

|option-adjusted spread (OAS) |(1) A measurement of the return provided to an investor from a financial instrument that is either an option or that |

| |includes an option. The option-adjusted spread calculations break up a security into separate cash flows. Each of those |

| |cash flows is discounted at a unique discount rate appropriate for its maturity. The discount rates are obtained from a |

| |benchmark yield curve. The benchmark yield curve is simply the currently available (spot) yields for risk-free |

| |investments of various maturities. Since U.S. Treasury obligations are not considered to have any credit risk, Treasury |

| |rates are used. OAS is not quoted as a yield. Instead, it is quoted as a difference, or spread, in basis points. |

| |(2) A valuation technique for valuing financial instruments, portfolios of financial instruments, or financial |

| |institutions with options. This tool is one component used in the Office of Thrift Supervision net portfolio value model|

| |for modeling the interest rate risk in complex financial instruments. This methodology is also used by high-end |

| |commercial interest rate risk analysis models. |

|option risk |The risk that a change in prevailing interest rates will lead to an adverse impact on earnings or capital caused by |

| |changes in the timing of cash flows from investments. Cash flows may be received earlier than expected as a result of |

| |the exercise of options or of embedded options in financial contracts. One of the four primary components of interest |

| |rate risk. Option risk usually arises when a change in prevailing interest rates prompts the option holder to exercise |

| |the option. See option. |

|option writer |The seller of a put or call option. |

|original face or original face value |The total principal amount of all of the loans in an MBS pool as of the issue date. |

|original-issue discount (OID) |The amount of the difference between the par or redemption price and the price of the security at the time of its |

| |original issue. Issuers can issue securities with OID as an alternative to making periodic interest payments as a means |

| |of compensating investors. Zero coupon notes, strips, discount notes, and banker’s acceptances are examples of |

| |investment types with OID. For those instruments, the return provided to the investor comes in the form of a discount. |

| |OID should not be confused with the discounts that investors may pay for either coupon-bearing instruments or discount |

| |instruments resulting from a change in prevailing rates subsequent to the issuance of a security. OID is subject to |

| |different income tax treatment than discounts resulting from changes in market prices. |

|OTC |See over the counter. |

|other comprehensive income (OCI) |A term defined by FAS 130. FAS 130 identifies three components of other comprehensive income |

|OTS |See Office of Thrift Supervision. |

|out of the money |The situation where an option has only time value as opposed to intrinsic value because of the relationship between the |

| |option's strike price and the current market price for the underlying instrument, the spot price. A call option is out |

| |of the money when the strike price is above the spot price. A put option is out of the money when the strike price is |

| |below the spot price. |

|over collateralization |A type of credit enhancement used in some asset backed securities and some private mortgage backed securities. The |

| |principal amount of the collateral pledged for a given security exceeds to the principal amount of the security. |

|over the counter (OTC) |Purchases and sales of financial instruments that do not take place in organized exchanges such as the New York Stock |

| |Exchange or the Chicago Board of Trade are termed over the counter. The phrase may be used as a noun to describe capital|

| |markets other than organized exchanges. The phrase may also be used as an adjective to describe instruments not traded |

| |on an organized exchange, such as over-the-counter derivatives. |

|over trading |See adjusted trading. |

|ownership and encumbrance reports |See title search. |

P

|P & I |Principal and interest as in the principal and interest required for periodic loan repayments. |

|PAC tranche |Planned amortization class tranche. A REMIC security created to receive selected cash flows from a pool of underlying |

| |mortgages securing the REMIC. PAC tranches use a structure similar to a sinking fund to establish a fixed principal |

| |payment schedule. Created together with a companion or support tranche. |

|PAC Z tranche or PAC Z bond |A CMO Z bond with some call and extension protection provided by collars. Like other Z bonds, a PAC Z bond earns |

| |interest that is accrued but not paid in cash for a defined time period. See Z tranche. |

|pair-off |A security purchase transaction that is closed out or sold on or before the settlement or expiration date. In a |

| |pair-off, the investor commits to purchase a security. Then, prior to the predetermined settlement date, the investor |

| |offsets that purchase with a sale of the same security that is arranged to settle on or before the settlement date for |

| |the purchase. Instead of paying for the purchased security on the settlement date, the investor need only pay or receive|

| |the difference between the purchase and sale prices. Pair-offs are price speculations that are considered trading |

| |activities and may be criticized by bank examiners if not handled as trading activities. |

|par |(1) The principal or maturity value of a non-amortizing, debt security. |

| |(2) The current face of a mortgage-backed security. See par line. |

| |(3) The price at which the face value of a debt security equals its selling price or 100. |

| |(4) For stocks, the face or nominal amount of a share. |

|par line |The parity price at which the yield of a mortgage-backed bond equals its net coupon rate. Because of the delay days, the|

| |par line is not 100 but instead is somewhat lower. Par line is not constant for different coupon rates at different |

| |delay days. However, it is not a function of prepayment speeds. |

|par value |See par for all securities except MBSs. See par line for MBSs. |

|par yield curve |See yield curve. |

|parallel yield curve shift |A change in interest rates that affects all of the different maturities for an instrument by the same amount. For |

| |example, if there was a parallel shift in U. S. Treasury rates in the amount of a 25 basis point increase, every |

| |maturity from 30 days to 30 years would rise by 25 basis points. The new yield curve, or graphical depiction of the term|

| |structure of interest rates, would be 25 basis points above the old yield curve at all points. |

|pari passu |A lending term meaning at an equal rate or pace. |

|parity price |(1) For a mortgage-backed security, see par line. |

| |(2) For a convertible security, see conversion value. |

|parity value of a convertible bond |See conversion value. |

|partial duration |A duration measure calculated by changing one variable while all other variable are held constant. The most common |

| |example Is key rate duration where all variables are held constant except the yield for a specific maturity point on the|

| |yield curve. Another application of partial duration is the calculation of option-adjusted duration by changing a |

| |variable such the OAS while holding all other variables constant. |

|partial release |A document or a process in which a secured party gives up its collateral interest in a portion of the property of the |

| |debtor that is pledged to secure a loan. For example, if a real estate developer has pledged 10 lots as collateral for a|

| |loan, a partial release may be used for each lot as it is sold. For personal property collateral, a partial release may |

| |be entered into the public record by using a standard form called a UCC-3. |

|participation |An agreement between lenders to share a commitment to extend funds (if any), the extension of funds, and the credit risk|

| |for one or more credit facilities to a borrower. Almost always evidenced by a written agreement. |

|partnership |See general partnership and limited partnership. |

|pass-through |The original type of MBS structure. In a pass-through, investors own a pro rata claim to the cash flows from the pool of|

| |underlying mortgages. Each investor’s pro rata share of interest and principal is remitted to the investor, "passed |

| |through," by an agent. |

|pass-through rate |The net amount of interest paid to investors owning mortgage-backed securities after all servicing and guarantee fees |

| |are deducted. |

|path-dependent options |Options whose exercise is influenced by the historical trend in interest rates in addition to the current level of |

| |interest rates. The exercise of a path dependent option is influenced by whether or not it is in the money as well as by|

| |how many times that option has previously been that deep in the money. Loan prepayments are path dependent. For example,|

| |if interest rates fall to 8 percent, a borrower with an 11 percent loan is less likely to prepay his loan than another |

| |borrower if rates have fallen to 8 percent and returned to 11 percent several times since the first borrower obtained |

| |his loan but only fallen to 8 percent once since the second borrower obtained his loan. |

|patriot Act |Short name for the "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct |

| |Terrorism Act of 2001" ("USA PATRIOT Act"). The Patriot Act was signed by President Bush on October 26, 2001. |

| |This act contains a number of significant regulatory requirements for banks. Section 314(b) permits financial |

| |institutions, upon providing notice to the United States Department of the Treasury, to share information with one |

| |another in order to identify and report to the federal government activities that may involve money laundering or |

| |terrorist activity. Section 326 of the USA PATRIOT Act requires that financial institutions implement reasonable |

| |procedures to (1) verify the identity of any person opening an account; (2) maintain records of the information used to |

| |verify the person's identity; and (3) determine whether the person appears on any list of known or suspected terrorists |

| |or terrorist organizations. Additional provisions prohibit banks from having accounts with shell banks, address |

| |availability of bank records, and change and clarify suspicious activity report requirements. |

|payable-through-draft (PTD) |A form of check that is written on an organization other than a bank but is payable through banks. Credit union "checks"|

| |are actually PTDs. PTDs are recognized as disbursements after they clear, not when they are written. A PTD functions the|

| |same as a warrant. |

|payee processing float |Time between when a payment is received and when the funds are deposited. When employees hold their paychecks over a |

| |weekend and when vendors process receipts only once a week, the payor benefits from the extra time its investments earn |

| |interest. These beneficial payee processing delays are limited to payments by check. Electronic payments (wire transfers|

| |and ACH credits) produce no processing delay at all. |

|paying agent |An entity responsible for paying bond principal and interest on behalf of the debtor. |

|payment bond |A type of insurance purchased by a builder that protects both the bank and the owner by providing that the insurance |

| |company will be responsible for payments due to laborers and other parties who provided services for the building |

| |project. |

|payment date |The date that dividends, interest, or principal and interest payments are due to be paid to the owner of record of a |

| |security. |

|payment guaranty |A guaranty in which the signer is guarantying payment of the obligation upon the borrower's failure to pay without the |

| |bank having to first attempt to collect from the borrower or from any collateral. |

|payment intangible |A general intangible under which a debtor’s principal obligation is a monetary obligation from a third party. A category|

| |of personal property collateral defined by the 2000 revisions to Article 9 of the Uniform Commercial Code. |

|payment processing float |See administrative float. |

|payments systems disruptions |A type of systemic liquidity risk. The risk of funding problems arising from the failure to receive funds due to the |

| |bank. A payments system disruption need not result from an operational or computer failure. If one party fails to make a|

| |required funds transfer, that failure can trigger more defaults down the line. See systemic liquidity risk. |

|PBO |See projected benefit obligation. |

|penciled in |An informal expression used to indicate that a potential buyer's offer to purchase a portion of a new issue is accepted |

| |subject to the potential seller winning the bid to become the underwriter. |

|Pension Benefit Guaranty Corporation |A U.S. Government agency that was created to insure guaranteed pension benefits. PBGC has statutory authority to claim |

|(PBGC) |up to 30% of the net assets of a firm that sponsors a pension plan when an underfunded plan is terminated. Such a PBGC |

| |claim is granted the same priority over the claims of other creditors as a tax lien. |

|perfected security interest |A collateral interest in personal property collateral that has been properly documented. See security agreement and |

| |perfection. |

|perfection |The name for a procedure established by Article 9 of the Uniform Commercial Code. Creditors must comply with this |

| |procedure in order to establish the priority of their security interest in personal property relative to the priority of|

| |security interests in the same property that may be held by other creditors. (It may be used when an interest in |

| |collateral is provided by the debtor or by a guarantor or other third party.) Perfection does not normally constitute |

| |the actual agreement between the secured party and the debtor. By itself, perfection does not create a security interest|

| |and must therefore be supported by a separate security agreement or pledge agreement. There are several different |

| |procedures that can be used to achieve perfection of a security interest in a debtor’s personal property. The most |

| |common method is perfection by filing a financing statement. See financing statements and security agreement. |

|performance bond |A type of insurance purchased by a builder that protects both the bank and the owner by providing that the insurance |

| |company will be responsible for completing construction if the contractor fails to do so. |

|periodic cap |The maximum amount by which an adjustable-rate security’s coupon rate can change in any given period of time. Also |

| |called reset cap. For most ARMs and floaters, the maximum periodic or reset change is defined as an amount of change in |

| |each consecutive 12-month period over the life of the security. Thus the term annual cap is also used to describe most |

| |periodic caps. |

|permanent lender |A lender, which may be a financial institution, an insurance company, or a pension fund, that finances real estate |

| |projects after construction is completed. Also called end lender. See takeout commitments. |

|permanent working capital |An informal phrase used to describe the amount of short-term liabilities needed to offset a continuous or nearly |

| |continuous working capital shortfall. Also used as a name for a borrower's need for year-round working capital |

| |financing. This type of financing is usually needed by rapidly growing and/or undercapitalized firms and is usually |

| |provided by asset-based lenders. |

|personal property |Defined by law to be all property that is not real property. Further classified in Article 9 of the Uniform Commercial |

| |Code into various categories. |

|personalty |Personal property. |

|phase I audit |The most common form of environmental liability risk assessment. A phase I audit consists of a thorough review of the |

| |past and present ownership of the property as well as the past and present uses of the property. These reviews include |

| |examinations of public records regarding the property. Additional information is obtained from both a physical |

| |inspection of the property and from interviews with people who are familiar with the property. The goal of a phase I |

| |audit is to determine the presence or the likely presence of hazardous substances in the buildings, soil or ground |

| |water. Phase I audits are noninvasive and do not include the collection or analysis of samples. Accordingly, the |

| |findings of a phase I audit cannot be conclusive. The audit merely determines whether further investigations are needed.|

|phase II audit |An environmental liability risk assessment. A phase II audit is usually conducted only when the phase I audit or other |

| |information about the property or about the activities conducted on the property indicate that there is a possibility of|

| |contamination. In the phase II audit, qualified individuals collect ground and water samples, test storage tanks, and/or|

| |collect building materials samples. Drilling may be conducted to obtain subsurface soil samples. Samples are then tested|

| |and analyzed. |

|pillar I, pillar II, pillar III |See Basel II. |

|pivot point |The point on a yield curve that separates the rising rates from the falling rates when yield curves flatten or steepen. |

| |Often near the five year point. |

|plain vanilla |Simple; not complex. Sometimes used to differentiate pass-through MBS pools from CMO structures. More often used to mean|

| |sequential-pay REMICs, the simplest REMIC structure. |

|planned amortization class (PAC) tranche|A REMIC security created to receive selected cash flows from a pool of underlying mortgages securing the REMIC. PAC |

| |tranches use a structure similar to a sinking fund to establish a fixed principal payment schedule. Created together |

| |with a companion or support tranche. PAC tranches are intended to have low call and low extension risk. Sometimes called|

| |controlled amortization bonds. |

|platted land |Land that has been divided into lots described in a plat plan that is filed in the real estate records of a political |

| |entity. |

|plus |An informal term for 1/64. Half of 1/32, the smallest increment commonly used to quote the price of an agency security. |

| |For example, a quoted price of 101 and 5/32 plus is equivalent to 101 and 11/64ths. |

|PO or P/O |See principal-only strip. |

|point |See basis point. |

|political subdivision |A county, city, town, or other municipal corporation, a public authority, and generally any publicly owned entity that |

| |is an instrumentality of a state or of a municipal corporation. |

|pool |(1) For mortgage-backed securities, a pool is a group of mortgage loans backing an individual security issue. |

| |(2) In funds transfer pricing systems, a pool is an aggregation of funds to provide average or moving average cost of |

| |funds for allocation to products or business units. |

|pool factor |See factor. |

|portfolio |A collection of financial assets belonging to a single owner. For example, the municipal bond portfolio. Risk in |

| |portfolios is reduced by diversification. |

|positioning |The act of holding a financial instrument, one or more portfolios of financial instruments, or one’s entire balance |

| |sheet in a way that exposes the holder to profits or losses from future changes in market prices. Positions may be taken|

| |with the intent to profit from expected future market changes (trading activities); may result from inventories of |

| |financial assets maintained for sale to customers (dealing activities); or may be the result of the net exposure from |

| |transactions (residual positions resulting from trading activities, dealing activities, or customer accommodations). |

| |Banks take positions in one of two ways: (1) In their trading accounts, banks (mainly large banks) may take positions |

| |with one or more financial instruments in the expectation of profiting from future rate changes. (2) More typically, |

| |banks hold or take balance sheet positions. The cumulative interest rate risk exposure from customer deposits, loans, |

| |and other activities creates a net residual position that the bank may or may not hedge. Choosing not to hedge is |

| |positioning. Alternatively, banks may create a position or add to a residual position in the expectation of profiting |

| |from them. |

|positive convexity |A particular type of instability in the duration of an instrument. Positive convexity means that as yields rise, |

| |duration declines. Graphically, this is seen as a price/yield curve for which the price at very low and very high yields|

| |exceeds the price indicated by a straight, tangent line. For an instrument with positive convexity, duration overstates |

| |the interest rate sensitivity. If convexity is low, that is, if the price/yield relationship is close to a straight |

| |line, duration is stable. If convexity is high, duration is unstable. The greater an instrument's convexity, the less |

| |accurate duration will be. |

|positive correlation |See correlation. |

|positive duration |(1) The name for a particular relationship between changes in the price of a debt security and changes in prevailing |

| |interest rates. When a security has positive duration, its price increases in response to a decrease in prevailing |

| |market rates. Almost all securities have positive duration. Note that the term "duration" as used in this definition |

| |refers to modified duration. See convexity, modified duration and negative duration. |

| |(2) For a financial institution, a situation in which the total duration of its assets is longer than the total duration|

| |of its liabilities. In such cases, the duration of equity is positive. In other words, an entity with long-term assets |

| |funded by short-term liabilities will have a positive duration of equity. A financial institution that has a positive |

| |duration of equity may also be described as having a negative gap or as being liability sensitive. The theoretical |

| |equity value, but not necessarily the stock price, of a financial institution with a positive duration of equity will |

| |decrease if interest rates rise and increase if interest rates decline. Note that the term "duration" as used in this |

| |definition refers to modified duration. See convexity, modified duration and negative duration. |

|positive gap |A term referring to an asset-sensitive condition. A mismatch in which interest-sensitive assets exceed |

| |interest-sensitive liabilities. |

|positive response verification |A form of auditing account balances in which the account debtor is requested to respond to either confirm or dispute the|

| |balance. One of two forms of direct verification. |

|positive sloping yield curve |See yield curve slope. |

|postclosing lien search |An investigation of the appropriate public records, conducted shortly after the closing of a secured transaction, to |

| |verify that the creditor’s security interest in the collateral was properly recorded and that it received the priority |

| |intended. See lien search. |

|preauthorized check |A process by which the issuer of a check gives written permission to have the check written and charged against his or |

| |her account on a predetermined basis. |

|prebid conference |A conference held with potential bank bidders to explain a request for proposal and answer questions. |

|preclosing lien search |An investigation of the appropriate public records, conducted shortly before the closing of a secured transaction, to |

| |determine the likely priority that will be received for the creditor’s security interest in the proposed collateral. See|

| |lien search. |

|preference |A legal term used in bankruptcy to describe a transaction deemed to have occurred under circumstances favorable to the |

|preference period |creditor that benefited from the transaction. This provision is intended to protect unsecured creditors. Under the U.S. |

| |Bankruptcy Code, the preference period for most creditors is 90 days prior the date of the debtor's petition filing. The|

| |exception is a one year preference period applicable to creditors deemed to be an "insider" with respect to the bankrupt|

| |debtor. Collateral interests obtained by a creditor during the preference period are undone by the bankruptcy. See |

| |insiders. |

|preferential transfer |See preference. |

|preferred stock |A type of equity or capital representing shares of ownership in a corporation. May or may not receive distributions of |

| |corporate income in the form of dividends. Has a higher priority claim to corporate earnings or assets than common stock|

| |but lower priority than corporate debt. A corporation may issue more than one class of preferred stock with differing |

| |priority status such as first or second preferred. Often preferred stock issues have a defined dividend payment rate as |

| |long as there are sufficient corporate earnings to distribute. |

|premium |(1) The amount by which the price for a security is greater than its par amount. |

| |(2) The amount that must be paid above the par amount for an issuer to call or refund an issue before its maturity. |

| |(3) The amount paid to purchase an option. |

| |(4 The cost of an insurance policy. |

| |(5) In banking, the segment of an interest rate that is offered or paid by one issuer representing the difference |

| |between the rate offered or paid by that issuer and the rate that other issuers of the same type offer or pay for |

| |similar issues. For example, the extra or higher interest rate that a distressed bank must pay above rates offered by |

| |other banks in order to attract funds. |

|premium payer |The party in an options collar contract required to pay the difference between the cap and floor. |

|prepaids |Expenses that are capitalized as assets on a firm's financial statements because they will be charged against activities|

| |in the near future rather than past activities. Also called prepaid expenses, prepaid assets or prepaid items. For |

| |example, if insurance premiums for the next six months are paid today, the amount paid may be shown as a pre- paid |

| |asset. The asset in that example would then be reduced to zero over the following six months by recognizing one-sixth of|

| |the amount as an expense in each of next six months. Insurance, taxes, and subscriptions are common prepaid expenses. |

|prepayment estimate |A reasonable and supportable forecast of loan prepayments. In the case of a mortgage-backed security, it is the forecast|

| |of principal amortization caused by loan prepayments. A single prepayment estimate is associated with each projected |

| |interest rate environment. Estimates are used to forecast expected lives. Investors typically examine data for a range |

| |of prepayment estimates applicable to a range of preselected rate changes. |

|prepayment or prepayments |(1) noun — A term used to describe loan or bond principal payments that are made in excess of the scheduled principal |

| |payments and before maturity. Any amount paid to reduce the principal before the due date or in excess of the required |

| |principal amortization. Prepayments may be voluntary or involuntary. For example, most residential mortgage loan |

| |contracts permit the homeowner to voluntarily prepay his or her loan at any time. Involuntary prepayments are |

| |liquidations resulting from foreclosures, condemnations, or casualty. |

| |2) verb — The action of making excess or early payments. |

|prepayment penalty |A fee that must be paid to the lender if the borrower prepays a loan within a defined time period. Many consumer loans, |

| |especially residential mortgage loans, do not have prepayment penalties. |

|prepayment rate |A representation that reflects the rate at which prepayments are received or forecasted to be received for a mortgage |

| |loan, a pool of mortgage loans, or an MBS. May be expressed as a PSA or CPR speed. |

|prepayment risk |The risk that prepayments will speed or slow and therefore change the yield and/or life of the security. |

|pre-refunding (pre-re) |The sale of bonds used to obtain funds that are then placed in escrow to back bonds previously issued. The first issue |

| |typically comprises bonds that were originally issued at high, fixed coupon rates and that could not be called when |

| |rates subsequently fell. Since they could not be called, the issuer’s alternative method for reducing its interest cost |

| |for the debt is to issue new, lower cost debt and to use the proceeds of the new bonds to purchase Treasury securities. |

| |The interest received from the Treasury securities pays the interest due for the pre-refunded bonds until they can be |

| |called or until they mature. The original set of bonds is said to be pre-refunded by the second set of bonds. Those |

| |pre-refunded bonds have very little credit risk since the cash for their debt service comes from the Treasury securities|

| |and does not depend on the issuer. See refunding escrow deposits. |

|presentment |A process by which a check is presented for payment at the drawee’s bank. |

|price |The amount paid for a security. The price of a security is usually expressed as a percentage of its par value. For |

| |mortgage-related securities, the price is usually expressed as a percentage of the current face value. A price greater |

| |than 100 percent is a premium price while a price less than 100 percent is a discount price. See current face, discount,|

| |par and premium. |

|price risk |The risk that the market value of an asset or liability will change adversely. One of nine risks defined by the OCC. The|

| |OCC defines price risk as the risk to earnings or capital arising from adverse changes in the value of portfolios of |

| |financial instruments. Since such adverse changes generally result from changes in prevailing interest rates, price risk|

| |is essentially the same as interest rate risk. The Federal Reserve includes this risk in its definition of market risk. |

| |See interest rate risk and market risk. |

|primary market |The issuance (sale) of new securities. As distinguished from the secondary market. |

|primary reserves |For a bank, assets considered to be the primary source of extra liquidity. Primary reserves are usually defined to be |

| |cash on hand, balances on deposit with the Federal Reserve Bank, and balances due from correspondent banks (e.g., cash |

| |and due from banks). |

|principal |The remaining balance owed on a loan by a borrower or on a security by its issuer, exclusive of any accrued interest. |

|principal component analysis (PCA) |A mathematical tool used to reduce the number of variables while retaining the original variability of the data The |

| |first principal component accounts for as much of the variability in the data as possible, and each succeeding component|

| |accounts for as much of the remaining variability as possible. In interest rate risk analysis, PCA is applied to define |

| |non-parallel yield curve sifts to model. The number of variables is equal to the number of points on the yield curve, |

| |the first principal component is the rate level, the second is the twist or rotation of the yield curve around a pivot |

| |point and the third is the change in curvature or "bow" in the yield curve. |

|principal-only strip (P/O) |A form of stripped mortgage-backed security that only passes principal payments received from the underlying mortgage |

| |loans to the security owners. May be a REMIC tranche. |

|prior service costs |Costs that arise from amendments to defined benefit pension plans that retroactively increase benefits. In rare cases, |

| |retroactive amendments that decrease benefits can create negative prior service costs. Under FAS 87 rules, these costs |

| |are not added to the minimum pension liability reported on the balance sheets for sponsors of underfunded defined |

| |benefit pension plans. Instead, the costs are amortized over the projected remaining service lives for the employees |

| |expected to receive benefits. The amortization increases the reported benefit expense of the sponsoring firm. The |

| |unamortized portion of this off-balance sheet liability is disclosed as "unrecognized prior service costs" in a footnote|

| |to the financial statements. |

|private placement |Instead of being sold to the general public after completion of an SEC registration, some bonds are sold privately, |

| |without a registration, to one or a few investors. When a bond issue is underwritten in this way, it is called a private|

| |placement. |

|private pool |Mortgage-backed securities not issued by or guaranteed by a U.S government agency or U.S. government sponsored |

|private label |enterprise. The mortgage loans comprising private pools are generally loans that do not meet GNMA, FNMA, or FHLMC |

| |requirements. Private pools may be structured as fixed-rate pass-through securities, floating-rate pass-through |

| |securities, or CMOs. Also known as whole loan pools. |

|pro formas or pro forma statements |Financial information, often just balance sheets, prepared by adjusting a recent financial report to show the effect of |

| |recent or planned changes. Projected financial statements. |

|probability distribution |The mathematical function describing the probability of different events, as described by values for a variable. A |

| |symmetrical distribution (one where to values are evenly distributed around the mean) is called a bell curve, a normal |

| |distribution or Gaussian bell curve. Values that are far more widely spread from the mean are said to have "fat tails", |

| |an informal name for kurtosis. Credit risk and liquidity risk have distributions that are very asymmetrical a phenomena |

| |called "skewness". |

|proceeds |Money or property received when collateral is sold, exchanged, or collected. |

|processed goods |Goods that become part of a product or mass of goods. An example is the flour used to bake bread. |

|processing float |The internal processing time that an organization takes to prepare a receipt for a deposit or an invoice for payment. |

|products |Property that is created from other property. |

|professional corporations |Entities sometimes used by doctors, lawyers, and other professionals. These entities can provide favorable tax treatment|

| |and administrative advantages and can therefore be advantageous to the professionals who use them. In most respects, |

| |other than taxes, they are indistinguishable from all other corporations. |

|progress payments |Progress payments are payments made by the purchaser in stages as the seller acquires or builds the property to be sold.|

| |A written purchase agreement or contract establishes the seller's rights to claim payments before the property is |

| |delivered to the buyer. When the Federal government is making progress payments, the purchase contracts usually include |

| |standard clauses that affect secured lenders. These clauses provide that title to all materials, inventory, fixtures, |

| |and equipment that are chargeable to the government contract vests in the government. |

|projected benefit obligation (PBO) |The actuarial present value of the pension benefits earned to date. In contrast to the ABO, measurement of the projected|

| |benefit obligation incorporates assumptions for future compensation rates for pay-related benefit plans. The PBO must be|

| |disclosed in a footnote to the financial statements. |

|projections |Projected financial statements showing predicted income, cash flow, and/or balance sheets. Unlike pro forma statements, |

| |projections typically cover multiple time periods — sometimes as many as five future years. |

|promissory note |A written contract between a borrower/debtor and a lender/creditor in which the borrower agrees to repay a loan granted |

| |by the lender. The contract specifies the amount of the loan and the terms of repayment. |

|proprietary trading |Trading activity that is conducted purely for the anticipated profit of the trading entity. The term is used to |

| |distinguish such trades from trading that is conducted for customers, for market-making, or for hedging. Also called |

| |strategic trading. |

|proprietorship |Name used to identify a business that is not a separate legal entity but instead is operated by an individual. |

|prospectus |A document that describes the details and financial support for a new bond or stock issue offering. A prospectus is |

| |required by the Securities and Exchange Commission. |

|protection buyer |Parties in a credit derivatives transaction. See credit derivative, credit swap, credit options and credit linked note. |

|protection seller | |

|Prothonotary |The name used in some states, (e.g., Pennsylvania) for the public official responsible for receiving and maintaining |

| |public notices of liens such as financing statements. Usually a county official. |

|provisional call protection |See soft call protection (for convertible bonds). |

|prudential liquidity |Liquidity held for liquidity contingency risk or as a safety cushion. Also called standby liquidity. |

|PSA |See Bond Market Association and PSA model. |

|PSA model |One of two standard models for describing the rate at which prepayments have been, are, or are expected to be received |

| |for mortgages and mortgage-backed securities. The model assumes that borrowers are far less likely to refinance a new |

| |mortgage than they are to refinance an older mortgage. Thus the PSA model builds in an assumption of a 30-month phasein |

| |or ramp-up of prepayments. After a mortgage or a pool of mortgages is 30 months old, a speed of 100 percent PSA is equal|

| |to 6 percent CPR. Similarly, a speed of 200 percent PSA is equal to 12 percent CPR and 50 percent PSA is equal to 3 |

| |percent CPR. During the initial 30-month ramp-up, the PSA model assumes much slower speeds. For the first month, 100 |

| |percent PSA equals 0.20 percent CPR. In the second month, 100 percent PSA equals 0.40 percent CPR. This level rate of |

| |increase continues throughout the 30-month period. PSA is the standard prepayment model of the Bond Market Association, |

| |formerly the Public Securities Association. The letters PSA were once an acronym for the former organization name but |

| |now stand for "prepayment speed assumptions." |

|PTD |See payable-through-draft. |

|public records |The records maintained by a filing authority that record the ownership and/or security interests held in property. Under|

| |Article 9 of the Uniform Commercial Code (UCC), creditors can perfect interests in a debtor’s personal property by |

| |recording a lien in the public records. Some states require such UCC filings to be made in a central, state-wide |

| |location. Other states require UCC filings to be made in public records maintained locally in each county. Both |

| |ownership and liens in real property are usually recorded in public records maintained by each county. |

|Public Securities Association (PSA) |Former name for the Bond Market Association. |

|public warehouse |A central warehouse that accepts, stores, and delivers goods for multiple businesses. Often, public warehouses are |

| |bonded. Importers often use bonded public warehouses located in or near points of entry to delay payment of duties. Food|

| |is often kept in public warehouses, including grain elevators. Public warehouses issue collateral receipts or warehouse |

| |receipts and can be used for controlling inventory pledged to secure loans. See warehouse receipt. |

|purchase money interest |A security interest in a debtor's property that is created when the creditor's extension of credit to the debtor is used|

| |by the debtor to acquire the property that is used to secure the transaction. |

|put |A contract that gives its holder the right to sell an underlying security, commodity, or currency on or before a certain|

| |date. The sale option is for a predetermined price called the strike price. Options are often used in hedging. See |

| |American option and European option. |

|puttable advance |A loan granted to a member financial institution by a Federal Home Loan Bank. The put feature in a puttable advance |

| |enables the borrower to prepay the advance, in whole or in part, in the event that prevailing rates decline. Borrowers |

| |benefit when using this type of borrowing to fund loans or investments that prepay when prevailing interest rates fall. |

|putable swap |A pay fixed/receive floating swap that grants the holder the option to cancel the swap before its maturity. |

Q

|qualified opinion |Term used to describe the opinion letter accompanying audited financial statements in which the CPA reports the same |

| |information as in the unqualified opinion with one or more additions. The additional information describes either (1) |

| |one or more material aspects of the scope of the audit that may be deviations from necessary practice or (2) uncertainty|

| |about the future that either cannot be resolved or the effect of which cannot be estimated. |

|quality spread |The difference in yield between a risk-free obligation, an obligation of the U. S. Treasury, and another obligation of |

| |similar maturity that has credit risk. This difference is expressed in basis points. The most common quality spread is |

| |the Treasury-Eurodollar spread (TED spread). Quality spreads are expressions of credit risk as yield differentials. See |

| |TED spread. |

|quick ratio |A commonly used, but not always accurate, proxy for a firm’s liquidity. The quick ratio is calculated by subtracting |

| |inventory from current assets and then dividing the result by current liabilities. Sometimes called the acid test ratio.|

|quit claim deed |A document by which title to real estate is conveyed from one party, the grantor, to another party, the grantee. The |

| |distinguishing characteristic of a quit claim deed is that it transfers only such interest, title, or right that the |

| |grantor has at the time of conveyance to the grantee. A quit claim deed is common in divorce or other situations such as|

| |equitable interests, in which the grantor’s interest is not clearly defined. |

R

|ramp |(1) A steady, noninstantaneous change in rates. Usually a projected change in rates with small, equal, incremental |

| |changes in each time period over a series of time periods until the full amount of the projected change is achieved. |

| |(2) A term used in residential lending and in the analysis of mortgage backed securities to describe projections of |

| |monthly prepayment speeds which increase from a low initial rate over a series of time periods until the full amount of |

| |the expected, final prepayment speed is reached. See PSA model for an example. |

|RAN |See revenue anticipation note. |

|range bonds |See accrual bond. |

|RAROC |See risk-adjusted return on capital. |

|rate |The cost of debt service paid by a borrower or issuer to a lender or investor. The rate is expressed as an annual |

| |percentage of the amount borrowed. For some notes and bonds that pay interest semiannually, the semiannual interest due |

| |to the investor used to be evidenced by a coupon that could be detached and sent for collection. Thus the cost to the |

| |issuer for notes and bonds paying semiannual interest is often called the coupon rate. Lenders or investors may receive |

| |a yield that is higher or lower than the rate. |

|rate covenant |A provision in the bond agreement or resolution that addresses the rate or method used to establish the fee(s) charged |

| |to users of the facility financed by the securities. Typically, a rate covenant promises that the fees will be adjusted |

| |when necessary to support the timely payment of interest and principal on the bonds. |

|rate risk |The risk that the entity's earnings and/or its capital may be reduced by an adverse change in prevailing interest rates.|

|rate sensitive |The exposure of either the bank's earnings or its market value to fluctuations caused by changes in prevailing interest |

| |rates. |

|rate-sensitive assets (RSA) |The quantity of assets subject to repricing within a defined time period. Usually related to rate-sensitive liabilities |

| |in the ratio: RSA divided by RSL. |

|rate-sensitive liabilities (RSL) |The quantity of liabilities subject to repricing within a defined time period. Usually related to rate-sensitive assets |

| |in the ratio: RSA divided by RSL. |

|rate shock |An arbitrarily selected change in prevailing interest rates used to quantify either a change in profits or a change in |

| |capital associated with that size of a rate change. |

|real bills doctrine |See commercial loan theory of liquidity. |

|real estate |See real property. |

|real estate investment trust (REIT) |A trust used to hold ownership of real property for investors. The trust structure is used to benefit from tax code |

| |provisions. |

|real estate mortgage investment conduit |The name of a type of mortgage-backed pass-through security. REMICs can take many forms. REMICs are typically multiclass|

|(REMIC) |securities. Unlike simple, non-REMIC CMOs, REMICs can separate mortgage pools into different risk classes as well as |

| |different maturity classes. Some of the most common forms of REMICs are sequential pay CMOs, planned amortization class |

| |(PAC) tranches, targeted amortization class (TAC) tranches, and companion tranches. REMICs may also have interest-only |

| |tranches, principal-only tranches, and residual tranches. Today almost all CMOs are issued in REMIC form to take |

| |advantage of provisions in the Tax Reform Act of 1986. However, even though REMICs are overwhelmingly dominant in the |

| |CMO market, the term "REMIC" is used far less often than the term "CMO." CMO is used to refer to all forms of MBSs other|

| |than simple pass-through MBS pools. |

|Real Estate Settlement Procedures Act |A Federal statute that requires lenders and persons who conduct real estate loan closings (settlements) to make certain |

|(RESPA) |disclosures. The law also prohibits certain practices such as kickbacks. The Department of Housing and Urban Development|

| |(HUD) has adopted Regulation X to implement this statute. |

|real property |Informally used to refer to land or buildings. As defined by Federal banking regulations governing appraisals, real |

| |property is: an identified parcel or tract of land including improvements, easements, rights of way, undivided or future|

| |interests, and similar rights but excluding mineral rights, timber rights, or growing crops. Note that under state law |

| |in many states, growing crops, timber, and minerals that have not been separated from the land are also included in the |

| |definition of real property. |

|realized volatility |Volatility calculated using the actual movements of prices in financial markets. See volatility and implied volatility. |

|receivables |Name used by bankers to describe moneys owed to a business and yet to be received. Usually the amounts due from trade |

| |creditors who purchased goods or services on credit. Functionally equivalent to accounts or accounts receivable except |

| |that accounts is the only legally acceptable way to describe these assets for purposes of Article 9 of the Uniform |

| |Commercial Code. |

|re-CMOs or re-REMICs |REMICs are created when tranches of existing CMO REMICs are combined and used to collateralize new securities. When this|

| |is done, the new securities are called re-REMICs, re-CMOs, or structured collateral. These may be more or less risky |

| |than the underlying tranches. See kitchen sink bonds. |

|reconveyance |See discharge. |

|record date |The date set to determine the owner entitled to the next dividend, interest, or principal payment. The payment is due to|

| |the owner who owned the security on the record date. |

|recourse |The right to seek repayment of debt. Usually used to describe the right to seek repayment from an originator or prior |

| |endorser who sold or assigned debt to another party. |

|red lining |Term used to describe the illegal practice of refusing to lend to borrowers located in a defined geographic area. |

|redemption fee |See back-end load. |

|reference asset |A term used in credit swap transactions to identify the underlying instrument. In the most simple structure, cash flow |

| |from the reference asset is paid by the asset owner called a protection buyer to a counter-party known as a protection |

| |seller. The reference asset is often a marketable, corporate bond rather than a corporate loan from the same obligor |

| |because the bonds provide price information than loans which are less homogenous and less marketable. See credit |

| |derivative and credit swap. |

|reference rate |An interest rate used as an index rate. For example, if a loan pays interest at a rate of 50 basis points above the |

| |6-month LIBOR, the reference rate is the 6-month LIBOR. |

|refunding |The replacement of existing securities using funds obtained from the issuance of new securities. |

|refunding bonds |Bonds issued to replace outstanding bond issues. Usually used to replace callable bonds when interest rates drop. |

|refunding escrow deposits (REDs) |Financial instruments similar to pre-refunding bonds. Tax law changes in 1984 restricted tax exempt pre-refundings for |

| |certain types of municipal debt including airport and convention center related debt. To circumvent those restrictions, |

| |a forward transaction, rather than a second bond issue, is used to lock in a lower cost of funding. Under this |

| |arrangement, funds dedicated to repaying higher cost debt at the next call date are held in escrow. See pre-refunding |

| |(pre-re). |

|Register of Deeds |The name used in some states for the public official responsible for receiving and maintaining public notices of liens |

| |such as financing statements. Usually a county official. |

|registered |A form of ownership of certificated bonds. The name of the owner is listed on the certificate and in the records of the |

| |issuer's agent. |

|regular way settlement |Buyers and sellers can negotiate settlement periods; however, standard time periods are usually used. For U.S. Treasury |

| |and agency debt securities, the customary settlement time, called regular way settlement, is the next business day. For |

| |municipal and corporate debt securities, the customary settlement period, often called corporate settlement, is three |

| |days. See net settlement and settlement. |

|Regulation AA |Federal Reserve Regulation titled Unfair or Deceptive Acts or Practices. Provides for consumer complaints against banks |

| |and prohibits certain practices. See cascading late charges and late charges. |

|Regulation B |See Equal Credit Opportunity Act. |

|Regulation C |See Home Mortgage Disclosure Act. |

|Regulation CC |A Federal Reserve Board regulation governing the availability of funds and collection of checks. The regulation sets |

| |legal limits on the time banks can take before making deposited funds available for withdrawal. |

|Regulation M |See Consumer Leasing Act. |

|Regulation P |A Federal Reserve Board regulation covering privacy of consumer financial Information. Regulation P governs the |

| |treatment of nonpublic personal information about consumers by financial institutions. The regulation also requires |

| |financial institutions to provide notice to customers about privacy policies and practices and the right of a consumer |

| |to prevent a financial institution from disclosing nonpublic personal information about him or her to nonaffiliated |

| |third parties by "opting out" of that disclosure. |

|Regulation T |Federal Reserve Regulation entitled Credit by Brokers and Dealers. Provides limits on the amount of credit that can be |

| |extended for the purpose of purchasing or carrying certain stocks and a few bonds. See margin stock. |

|Regulation U |Federal Reserve Regulation entitled Credits by Banks For the Purpose of Purchasing or Carrying Margin Stock. Provides |

| |limits on the amount of credit that can be extended for the purpose of purchasing or carrying certain stocks and a few |

| |bonds. See margin stock. |

|Regulation X |See Real Estate Settlement and Procedures Act. |

|Regulation Z |See annual percentage rate, rescission and Truth-in-Lending Act. |

|REIT |See real estate investment trust. |

|reinvestment risk |The risk of a decline in earnings or capital resulting from the fact the interest and/or principal cash flows received |

| |by investors during the time that an investment is held must be reinvested at a lower than expected rate as a result of |

| |a decline in prevailing interest rates. |

|relative value |A phrase used to refer to whether or not a security's price is relatively cheap, relatively fair, or relatively rich |

| |(expensive) compared to prices for other securities. |

|release |A document or a process in which a secured party gives up its collateral interest in the property of the debtor. |

| |Releases may be for all of the property of the debtor or may be partial. For example, if a real estate developer has |

| |pledged 10 lots as collateral for a loan, a partial release may be used for each lot as it is sold. For personal |

| |property collateral, a release may be entered into the public record by using a standard form called UCC-3. |

|release price |The predetermined amount of loan reduction that will be required by the bank before the developer can obtain a partial |

| |release of the bank's lien that covers the portion of the collateral that is being sold. |

|REMIC |See real estate mortgage investment conduit. |

|remittance float |Float due to the time a payment is in transit. This is often called mail float since its major component is the time it |

| |takes a remittance to move from the remitter to the recipient through the mail. |

|remote disbursement |An arrangement by which an organization’s checks are drawn against funds in a bank that is located in a distant area. A |

| |cash management practice designed to increase disbursement float. |

|replicating portfolio(s) |A portfolio of instruments with known rates and maturities that tends to closely duplicate the changes in a portfolio of|

| |instruments with administered rates and/or indeterminate maturities. Sometimes referred to as the "Rod Jacobs" method |

| |for the probable developer of this approach. |

|repo |An informal name for a repurchase agreement. |

|repositioning repurchase agreement |A funding technique often used by dealers who encourage speculation through the use of gains trading, pair-off, |

| |when-issued, and extended settlement ploys. When an investor agrees to purchase a security with the intent of quickly |

| |selling it for a profit, price movements do not always favor these speculations. The repositioning repurchase agreement |

| |is service offered by dealers to enable buyers to hold onto such speculative positions until prices change and the |

| |position can be closed out at a profit. In a repositioning repurchase agreement, the buyer pays the dealer a small |

| |margin that approximates the actual loss in the security. The dealer then agrees to fund the purchase of the security by|

| |entering into a repurchase/reverse repurchase agreement with the buyer. (The transaction is a borrowing called a |

| |repurchase agreement for the buyer. It is a loan called a reverse repurchase agreement for the dealer.) These |

| |transactions are deemed to be inherently speculative. |

|repossession |Taking physical possession of personal property collateral pledged to secure a defaulted loan. |

|repricing |(1) A contractual provision applicable to specific loans, investments, or deposits that changes the interest rate paid |

| |or received. For example, a loan may have an interest rate tied to the prime rate that changes every time the prime rate|

| |changes, or an investment may have a rate tied to the one-month LIBOR. It is immaterial which index, if any, the rate is|

| |linked to or when the rate adjusts. |

| |(2) As used in asset liability management (ALM), refers to the timing of cash flow from the principal of an asset that |

| |is received by the bank or the timing of payment of the principal of a liability by the bank. For example, in the case |

| |of a 5-year, fixed-rate investment, the principal is received at the end of 5 years, therefore, the asset reprices at |

| |the end of the fifth year. Note that the end of the fifth year could be tomorrow if the investment was issued 4 years |

| |and 364 days ago. In the case of a car loan, an amount equal to the monthly principal payments made to the bank reprices|

| |each month. In the case of a certificate of deposit, repricing occurs at maturity. |

|repricing risk |See mismatch risk. |

|repurchase agreement (RP) |A form of secured, short-term borrowing in which a security is sold with a simultaneous agreement to buy it back from |

| |the purchaser at a future date. The purchase and sales agreements are simultaneous but the transactions are not. The |

| |sale is a cash transaction while the return purchase is a forward transaction since it occurs at a future date. The |

| |seller/borrower pays interest to the buyer at a rate negotiated between the parties. Rates paid on repos are short-term |

| |money market interest rates and are completely unrelated to the coupon rate paid on the instrument being purchased. |

| |Informally known as repos. Sometimes called a classic repo to distinguish between these transactions and sell/buybacks. |

| |Every transaction where a security is sold under an agreement to be repurchased is a repo from the seller/borrower's |

| |point of view and a reverse from the buyer/lender's point of view. Repos and reverses are often used to finance |

| |investment purchases, especially by traders. |

|reputation risk |One of nine risks defined by the OCC and one of six risks defined by the Federal Reserve. The risk to earnings or |

| |capital arising from the possibility that negative publicity regarding the institution’s business practices, whether |

| |true or not, will cause a decline in its customer base, costly litigation, or revenue reductions. The Federal Reserve |

| |and the OCC define reputation risk in almost exactly the same way. |

|request for proposal (RFP) |A written notification prepared by an organization requesting offers to provide certain services (e.g., banking service)|

| |and to specify prices for these services. RFPs are generally quite detailed as to the types of services needed. |

|rescission |Cancellation of a contract without penalty. Regulation Z provides circumstances under which a borrower may cancel loan |

| |transactions involving nonpurchase money liens on the borrower's principal place of residence. The regulation permits |

| |such rescissions during a three day period after the loan closing. Specific requirements apply to bank disclosures of |

| |the borrower’s right to rescind. |

|reserve account |A type of credit enhancement used in some asset backed securities. The reserve account may be created by an initial |

| |deposit from the seller and may be augmented over time by the application of funds from excess servicing income. Credit |

| |is enhanced because withdrawals from the reserve account are made to reimburse investors when excess servicing is |

| |insufficient to cover charge -offs. Until needed, funds in a reserve account are invested. |

|reserve requirements |The percentages of different types of deposits that banks are required to hold on deposit at the Federal Reserve or as |

| |cash in their vaults. These requirements are determined by the Federal Reserve Board and function as a tool to control |

| |monetary policy. |

|reset cap |The maximum amount by which an adjustable-rate security’s coupon rate can change in any given period of time. Also |

| |called the periodic cap. For most ARMs and floaters, the maximum periodic or reset change is defined as an amount of |

| |change in each, consecutive 12-month period over the life of the security. Thus the term "annual" cap is also used to |

| |describe most periodic caps. |

|reset date |The point in time when the coupon rate for a variable rate or floating rate financial instrument is re-established to |

| |reflect changes in a benchmark index. Reset dates are typically monthly, quarterly, semi-annually or annually. See |

| |index. |

|residual |(1) For sequential-pay CMO structures, a residual tranche is the CMO tranche that receives the excess cash flow that |

| |remains after all of the payments due to the holders of other tranches and all of the administrative expenses have been |

| |met. When the residual is an accrual bond, it is often called a Z tranche or a Z bond. |

| |(2) In REMIC CMO structures, one class of each issue must be designated as the residual for tax purposes. Some REMIC |

| |residuals do not meet the traditional definition of a residual as the last tranche to be retired. |

|residual value |Term used to describe the market or sale value of leased equipment (net of removal or disposal costs) at the end of the |

| |lease term. In most cases, it is projected or estimated. Sometimes called salvage value. With some exceptions, national |

| |bank lessors are subject to a rule that limits the residual value assumption made at the time the lease is created to 25|

| |percent of the equipment's cost. Bank holding company leasing subsidiaries are subject to a 20 percent limit on the |

| |residual assumption. |

|reshaping duration |See key rate duration. |

|RESPA |See Real Estate Settlement Procedures Act. |

|restricted appraisal reports |One of three types of real estate appraisal reports defined under Uniform Standards of Professional Appraisal Practice |

| |(USPAP) rules. A restricted appraisal report is the least detailed of the three report formats. Given a bank’s need to |

| |meet both regulatory requirements and the needs of prudent loan underwriting, more detailed reports are almost always |

| |preferable. |

|restricted cash |Cash held subject to limitations on how or when it may be used. For example, refundable customer deposits, cash in |

| |escrow accounts, and debt sinking funds. |

|restricted stock |Restricted stock is stock purchased from the issuer or from a person in a controlled relationship to the issuer in a |

| |nonpublic or private transaction. The right to sell restricted stock is limited by provisions in the Securities and |

| |Exchange Act. |

|retail deposits |(1) Deposits or deposit account balances in amounts of $100,000 or less. |

| |(2) Deposits obtained from individuals and small businesses in the bank's local trade area(s). |

|retainage |The portion of the payment due to a contractor or equipment builder that is withheld until final inspection and |

| |acceptance of the work. Also called a holdback. |

|retained earnings |Earnings of a corporation from the current as well as prior years that have neither been distributed to the shareholders|

| |as dividends nor transferred to the surplus account. Corporate earnings accumulated over time. One of a corporation’s |

| |equity or capital accounts. |

|retentions |Portions of contracts that are not paid until all contract provisions are satisfied. Sometimes called holdbacks. |

|return on assets (ROA) |A percentage calculated by dividing net income after tax by total assets. Annual income is usually used in the |

| |numerator; however, the annualized income for a month, quarter, or half year can be used. Period-end assets is often |

| |used in this calculation; however, average assets for the period is more accurate. This ratio is a measurement of how |

| |profitably assets are used in an enterprise. Firms in different industries usually have quite different returns on |

| |assets. This ratio is best used to compare firms in the same industry. |

|return on capital |The return earned by an investor from a specific investment or group of investments measured in terms of a percentage |

| |return on the amount of capital invested. See return on equity. |

|return on equity (ROE) |A measure of the return realized by the owners of an enterprise. Calculated by dividing an enterprise’s annualized net |

| |income by its average capital for the period. Alternatively, it can be calculated by multiplying the enterprise’s ROA by|

| |its leverage/equity multiplier. ROE indicates how effectively the enterprise is using its capital to produce income. |

|returns |Reductions to gross sales that occur when customers are given credit for sold goods that are returned to the firm. |

|revenue anticipation note (RAN) |A short-term note sold by a public entity that will be repaid from the proceeds of anticipated nontax income. |

|revenue obligation |A bond or note for which the payments of principal and interest made to the investors by the issuer are payable |

| |exclusively from the earnings of the underlying project. For example, turnpike bonds repaid from tolls. |

|reverse |An informal name for a reverse repurchase agreement. |

|reverse repurchase agreement, reverse |A form of secured, short-term investment in which a security is purchased with a simultaneous agreement to sell it back |

|repo |to the seller at a future date. The purchase and sales agreements are simultaneous but the transactions are not. The |

| |purchase is a cash transaction while the return sale is a forward transaction since it occurs at a future date. |

| |Informally known as a reverse. The buyer/investor/lender earns interest paid at rate negotiated between the parties. |

| |Rates paid on reverse repos are short-term money market interest rates and are completely unrelated to the coupon rate |

| |paid on the instrument being purchased. Every transaction where a security is sold under an agreement to be repurchased |

| |is a repo from the seller/borrower's point of view and a reverse from the buyer/lender's point of view. Repos and |

| |reverses are often used to finance investment purchases, especially by traders. |

|reverse TAC tranche |The opposite of a TAC tranche. Bonds created in scheduled-pay CMO structures. A reverse TAC tranche is structured to |

| |avoid prepayment volatility. Each TAC has a designated target speed. When prepayments fall below the targeted speed, |

| |excess cash flow is diverted to the reverse TAC tranche. Unlike a PAC, a TAC tranche is not protected from call risk if |

| |prepayments are faster than expected. For this reason, TACs can be viewed as half PACs. Reverse TACs offer investors |

| |protection (but not immunity) from extension risk but no protection from call risk. Sometimes called contraction bonds |

| |because of their call risk. |

|review statements |Financial statements prepared by an independent CPA that have been subject to some examination but have not been |

| |audited. The CPA is required to consider the reasonableness of the information. If any number appears questionable, the |

| |CPA must make inquiries, apply analytical procedures or take other appropriate actions to provide the CPA with a |

| |reasonable basis for expressing limited assurance that there are no material modifications that should be made to the |

| |statements in order for them to be in conformity with GAAP. Any departure from GAAP in reviewed statements should be |

| |noted in the transmittal letter and detailed in a footnote. |

|revolving line of credit |A type of credit facility. A term that can be confusing, with different banks using the term to describe different types|

| |of credit facilities. |

| |In some banks, "revolving line of credit" refers to a credit facility that permits the borrower to draw down and/or |

| |repay amounts up to a specified maximum at any time. Called a line of credit by other banks. |

| |In other banks, the name "revolving line of credit" is used to distinguish between "regular lines of credit," |

| |(situations in which the bank is not legally committed to make advances) and "revolving lines," (situations in which the|

| |bank is legally committed to make advances.) This usage is outdated, wrong, and might expose the bank to legal |

| |liability. |

| |Large banks, primarily, use the term to refer to a combination of a line of credit and a term loan. Typically it starts |

| |out as a line for a one-to-three year period, after which, on a previously determined date, the outstanding balance |

| |converts to an amortizing term loan. |

|revolving period |A term used for asset backed securities to describe a period of time during which principal payments received from the |

| |underlying loan collateral are reinvested in new loan receivables thereby enabling the investor/ABS balance to remain |

| |constant. A revolving period may be prematurely terminated by an early amortization event. |

|RFP |See request for proposal. |

|rho |A Greek letter used in the financial industry to represent the sensitivity of an option’s price to changes in interest |

| |rates. |

|riparian land |Land that has been created by natural or manmade filling in or by moving of water. |

|risk |(1) Noun — The possibility of loss. |

| |(2) Noun — The uncertainty of whether events, expected or otherwise, will have an adverse impact. In this context, the |

| |adverse impact is usually a quantity of return (income) or value at risk. |

| |(3) Noun — the compound estimate of the probability of, and the severity of, an adverse event. The amount of risk is the|

| |product of the probability of the adverse consequence and the potential severity of that adverse consequence. |

| |(4) Verb — to incur the possibility of loss, to create or accept the possibility of uncertain returns, or to create or |

| |accept volatility. |

|risk-adjusted return on capital (RAROC) |An economic approach to measure unit and product profitability within a financial institution. Returns, adjusted to |

| |reflect normalized or expected losses, are divided by an amount of capital that is carefully quantified to reflect the |

| |risk or risks incurred to generate those returns. The total risk-adjusted capital for an entire financial institution |

| |reflects its calculated economic capital. Economic capital is the capital required to support the incurred risks. |

| |Economic capital will rarely, if ever, equal accounting or book-value capital. The risk-adjusted return on capital is |

| |usually compared to a standard or hurdle rate of return. When such comparisons are made, products or units with returns |

| |exceeding the hurdle rate are said to add value while products or units with returns below the hurdle rate are said to |

| |destroy value. RAROC is not always defined and applied exactly the same way by different financial institutions but must|

| |be defined and applied consistently throughout each financial institution that uses it. Often referred to by the acronym|

| |RAROC, pronounced "ray-rock." |

|risk-adjusted return |The profit, often but not always expressed as a percentage rate of return on allocated capital, after recognizing |

|risk-adjusted rate of return |applicable costs for credit risk, interest rate risk, liquidity risk and/or other financial risks. In some measures, |

| |risk costs are treated as expenses. In other measures, they are reflected in the amount of capital allocated in the |

| |denominator of the return on capital ratio. |

|risk-based capital |Rules for establishing minimum required levels of book capital for financial institutions. Capital is allocated to types|

| |of bank assets based upon weightings assigned to those assets. For example, U.S. Treasury obligations and some U.S. |

| |Agency obligations require no capital. Most other U.S. Agency obligations are given a 20 percent weighting for the |

| |purpose of calculating risk-based capital. Corporate obligations have a 100 percent weighting. |

|risk-based pricing |The practice of charging different rates to different borrowers based on differences in their credit worthiness. |

| |Typically, all other loan terms remain the same. See Fair and Accurate Transactions Act (FACT Act) for limitations on |

| |the application of risk-based pricing to consumer loans. |

|risk management |Controlling the probability, and/or the severity, of a potential adverse event so that the consequences of that event |

| |are within acceptable limits. Since all risks have, by definition, the potential to generate losses, and since capital |

| |is the ultimate protection against failure resulting from losses, the underlying basis of risk management is equivalent |

| |to managing solvency risk. |

|risk measurement unit (RMU) |A defined quantity or unit of risk. Quantities of risk may be defined for the purposes of setting risk exposure limits |

| |or for the purposes of allocating capital to measure risk-adjusted returns on capital. RMUs are often defined in terms |

| |of the amount of change or volatility that is equal to one standard deviation of the volatility. |

|RMA |See Robert Morris Associates. |

|RMU |See risk measurement unit. |

|ROA |See return on assets. |

|Robert Morris Associates |A national organization of bank commercial loan and credit officers. |

|Rod Jacobs method |A methodology for evaluating the rate sensitivity of indeterminate deposits. See replicating portfolio(s). |

|ROE |See return on equity. |

|roll over |The paying off of existing debt, usually debt about to mature, through the issuance of new debt. Can also refer to the |

| |rolling over of an investment, such as a certificate of deposit at maturity, to another investment. |

|rotation risk |See yield curve risk. |

|RP |See repurchase agreement. |

|RSA |See rate-sensitive assets. |

|RSL |See rate-sensitive liabilities. |

|Rule 144 |See SEC Rule 144. |

S

|S corporation |Legal entity that is a special kind of Corporation. An S corporation offers shareholders the same limitations on |

| |personal liability that are available to corporate stockholders. At the same time, S corporations are taxed similarly to|

| |partnerships, that is, the income or loss incurred by the S corporation is allocated to the stockholders for tax |

| |purposes. S corporations are subject to limits on stockholders and may not be part of affiliated corporate groups. |

|safekeeping |An arrangement under which a third party holds securities or other valuables under safe, controlled conditions. A |

| |safekeeping arrangement is evidenced by a safekeeping receipt. |

|Sallie Mae |See Student Loan Marketing Association. |

|SAR |See Suspicious Activity Report. |

|satisfaction |See discharge. |

|scenario |An outline of a hypothetical situation or chain of events. For example, a future recession. |

|scenario analysis |(1) In investment analysis, the process of examining the anticipated performance of an investment under a variety of |

| |alternative potential interest rate environments. |

| |(2) In bank asset/liability management, the process of modeling the anticipated effects of interest rate changes on the |

| |net income or capital of a financial institution. Scenario analysis incorporates assumptions for changes in the behavior|

| |of the institution's managers and its customers that are anticipated to be associated with the modeled changes in |

| |interest rates. |

|screw clause (for convertible bonds) |An informal market term for a contractual clause or provision in the indenture agreement for a convertible bond. A screw|

| |clause provides that, upon conversion, the convertible bondholder may not receive accrued interest on the bond. Screw |

| |clauses may work in different ways. For example, the first call date may coincide with an interest payment date and the |

| |conversion rights may expire just before the interest payment date. In that example, an investor cannot take advantage |

| |of the bond’s conversion feature without failing to hold the bond long enough to receive the semiannual interest |

| |payment. Another example is a mandatory convertible bond that requires conversion before the interest pay date. |

|seasoned issue or seasoned security |A mortgage-backed security with underlying mortgages that are seasoned loans. Sometimes described as vintage securities |

| |especially in the case of CMOs. |

|seasoned loans |Loans for which a year or more has passed since periodic payments began. GNMA requires that mortgages within a given |

| |pool be originated within two years of the issue date. FNMA and FHLMC pools may contain older mortgages called seasoned |

| |loans. |

|SEC |See Securities and Exchange Commission. |

|SEC Rule 144 |A rule issued by the SEC that governs stock issued under special circumstances. See control stock, dribble rule and |

| |restricted stock. |

|SEC yield |A measure of return for investments in mutual bond funds. The SEC yield is calculated by dividing the net investment |

| |income per share for the 30 days ended on the date of the calculation by the net asset value per share on that date. The|

| |SEC has required fund managers to report uniform, annualized 30-day yields since 1988. |

|secondary market |Markets for the purchase and sale of any previously issued financial instrument. The first sale of a financial |

| |instrument by the original issuer is said to be made on a primary market. All subsequent trades are said to be secondary|

| |market. |

|Section 17(f) |See Securities and Exchange Act Section 17(f). |

|Secured party |A creditor that has been granted a collateral interest in property. The collateral interest is usually given to the |

| |creditor by the debtor but may be given by a guarantor or another third party. |

|Securities and Exchange Act Section |A legal provision that requires investigations for possible lost or stolen securities. See Securities Information |

|17(f) |Center. |

|Securities and Exchange Commission (SEC)|The Federal agency with responsibility for regulating financial exchanges for cash instruments. |

|Securities Information Center (SIC) |A corporation that has been designated by the SEC to maintain and operate a national database of lost and stolen |

| |securities. Under Section 17(f) of the Securities and Exchange Act, banks, brokers, and dealers are required to use this|

| |database. |

|Securities Investors Protection |A private corporation providing insurance to brokerage firms to cover customer accounts up to $500,000 in securities |

|Corporation (SIPC) |(including $100,000 in cash). |

|securities lending |The temporary transfer of securities from an investor’s portfolio to a counterparty borrower. The counterparty may |

| |borrow to cover securities transaction fails (securities sold but for some reason unavailable for delivery to the |

| |buyers), short sales, or other trading activities such as arbitrage. While corporate stocks used to be the most common |

| |securities lent, U.S. government and agency securities now comprise a major portion of this activity. Securities loans |

| |are usually secured by the pledge of U.S. government or agency bonds. Alternatively, cash or letters of credit may back |

| |some securities loans. The value of the collateral pledged exceeds the value of the securities lent by an agreed-upon |

| |collateral margin. When a securities loan is terminated, the securities are returned to the lender and the collateral is|

| |returned to the borrower. The two main risks in securities lending are counterparty risk (a form of credit risk) and |

| |reinvestment risk (a form of interest rate or market risk). |

|securitization |The process and the result of pooling financial assets together and issuing liability and equity obligations backed by |

| |the resulting pool of assets to convert those assets into marketable securities. The underlying assets are usually, but |

| |always, non-marketable by themselves. Any type of financial asset can be securitized. Securitized mortgage obligations |

| |may be called mortgage backed securities or collateralized mortgage obligations. Securitized non-mortgage assets are |

| |typically called asset backed securities however the term collateralized debt obligation is increasingly used to refer |

| |to securitized corporate debts. A single loan or groups of similar loans may be securitized. Loans to be securitized |

| |must usually be underwritten with terms and documents that conform to wholesale market standards. For some |

| |securitizations, additional credit support, called credit enhancement, may be obtained through insurance, a letter of |

| |credit, over collateralization or other means. Many securitizations use multi-tranche structures that allocate the |

| |principal and interest cash flows from the underlying assets in patterns that create higher and lower risk securities. |

| |See collateralized debt obligation, collateralized mortgage obligation, mortgage-backed security, special purpose |

| |vehicle and waterfall. |

|security agreement |An agreement between one or more debtors and one or more creditors in which the debtor grants the creditor an interest |

| |in the debtor’s personal property as collateral for the debt. (Alternatively or in addition, the collateral may be |

| |property owned by a guarantor or by another third party.) As used in Article 9 of the Uniform Commercial Code, it is an |

| |agreement that: is in writing; gives the names of the parties; is signed or authenticated by the debtor; describes the |

| |collateral; and includes language stating that the debtor is granting or giving the security interest in the collateral |

| |to the creditor. While the security agreement establishes the creditor’s interest in the collateral, it does not |

| |establish the priority of the creditor’s interest relative to the interests of other creditors. See financing statements|

| |and perfection. |

|security interest |Term used to describe an interest in personal property (collateral) owned by a debtor. |

|security margin |See margin. |

|self-assessment |A risk evaluation approach. A subjective process of identifying risks, assessing the likelihood that they will occur and|

| |estimating the impact if they do occur. Although self assessment can be applied to any risk, it is primarily applied to |

| |operations risk - especially for the quantification of operations risk under Basel II guidelines. Self assessment is a |

| |major element in COSO. |

| |See Basel II, COSO and operations risk. |

|self-contained appraisal report |One of three types of real estate appraisal reports defined under Uniform Standards of Professional Appraisal Practice |

| |rules. A self-contained appraisal report is the most detailed of the three report formats. |

|sell/buyback |See buy/sellback. |

|senior creditor |A creditor holding senior debt. |

|senior debt |Obligations of an issuer for which repayment has contractually been given a priority that is higher than the repayment |

| |priority of other debts of the same obligor. This arrangement may arise from either a specific subordination agreement |

| |or a public issuance of subordinated debt instruments. |

|Senior Residential Appraiser (SRA) |A designation earned by qualifying residential real estate appraisers. It is awarded by the Appraisal Institute. |

|sensitivity test |A single variant test to see how dependent a forecast, projection or stress test outcome is upon a single, selected |

|sensitivity analysis |variable or assumption. For example, a bank AL manager might perform a sensitivity analysis by examining a range of rate|

| |risk forecasts where the only difference in the forecast generation is a range of possible values for savings account |

| |maturities. In that example, the AL manager would be able to see how sensitive the projected rate risk exposure is to |

| |changes in the savings maturity assumption. |

|sequential-pay REMIC |The most basic, simplest REMIC structure. All investors owning a sequential-pay REMIC receive interest payments; |

| |however, the principal received from the underlying mortgages is directed to repay each tranche, one at a time, in a |

| |predetermined order. |

|serial bond |A bond that provides for the amount of debt to be divided into a series of different staggered maturities. For example, |

| |instead of issuing$10 million of 15-year bonds, a municipality may issue $10 million with $1 million maturing each year |

| |from the year 6 to the year 15. By issuing debt in serial form, the municipal issuer can match its need to redeem |

| |maturing debts to its cash flow. This form also enables the issuer to save money since the shorter-term bonds carry a |

| |lower interest cost than longer-term debt. |

|servicing |The collection of principal, interest, and sometimes property taxes from borrowers; accounting for the cash flows due |

| |and the cash flows received; and remitting the cash flows to the entitled recipients. |

|servicing spread |A percentage of a loan’s or security’s principal amount that is paid to a third party as compensation for servicing. For|

| |example, in a mortgage pass-through security, the interest paid to the investors is typically one-half percent less than|

| |the weighted average coupon rate paid by the underlying borrowers. In that example, the one-half percent difference is |

| |the servicing spread. |

|set off |(1) In general, the legal right to reduce the amount owed by one party to another party by the sum that the second party|

| |also owes to the first party. |

| |(2) The confiscation of a deposits held by a borrower to offset some or all of the amounts owed by the depositor the |

| |depository institution for defaulted loans. A common law right that is usually blocked or reversed by a bankruptcy |

| |court. |

|settlement |(1) Noun — The standard number of days between the date that a purchase or sale is agreed upon (the trade date) and the |

| |date that the security and the payment actually change hands (the settlement date). See net settlement and regular way |

| |settlement. |

| |(2) Verb — The process of exchanging a security delivered by a seller for the payment delivered by a buyer. |

|settlement date |The agreed-upon date for transferring funds to complete a transaction. For example, the date of both the delivery of and|

| |the payment for a security. |

|settlement risk |The possibility that operational problems might interrupt or delay the settlement of a purchase or sale of a financial |

| |instrument. |

|SFAS |See statement of financial accounting standards. |

|shiftability theory of liquidity |An explanation of bank liquidity that holds that a bank’s capacity to meet liquidity demands is related to the volume of|

| |its assets that can be readily shifted to another bank. |

|shareholder value added (SVA) |A financial performance metric that attempts to measure the benefit created for a firm's capital holders. It is |

| |expressed in dollar terms for a period - not as a percentage return ratio. SVA is an adjusted value for after-tax |

| |earnings, for a period of time, minus the opportunity cost associated with the firm's capital. The net of those |

| |quantities is a measure of the surplus or additional value provided to the shareholders as a result of the firm's |

| |activities. The adjustments made to the reported amount of after-tax earnings are intended to remove distortions |

| |resulting from accrual accounting. For example, provisions for bad debts are usually added back to income and actual |

| |losses from bad debts are subtracted instead. Cash taxes are used instead of book taxes. One of the main attractions of |

| |this performance metric is that fact that, unlike measure of return on market value, it can be applied to segments |

| |within a firm. Accordingly, it is primarily used by managers to evaluate the performance of divisions or branches. Some |

| |users apply SVA down to the account manager or customer level. |

| |The phrase "shareholder value added" is favored because the phrase "economic value added" is marked. See value based |

| |management. |

|short |(1) noun — The position of an investor who sells, or commits to sell, a security in either the cash or futures markets. |

| |For example, the sale of an interest rate future is a commitment to deliver securities at some future date in exchange |

| |for an agreed-upon amount. This is called a short futures position. |

| |(2) verb — The act of selling or committing to sell in the future. |

|short sale |The sale of security that is not owned by the seller. The seller borrows the security, sells it, and then buys it at a |

| |later date to return it to the lender. The purpose of a short sale is to attempt to profit from the fall in the price of|

| |a security. Short sales are considered trading activities. For banks, when the security that is sold is "borrowed" from |

| |the seller's investment portfolio, the transaction is not considered a short sale; it must be treated as an outright |

| |sale of the underlying security. |

|SIC |See Securities Information Center. |

|sight draft |A draft that is payable upon presentation to the drawee. |

|simulation VAR |See empirical VAR. |

|single-family loans |Loans secured by properties occupied by one to four families. |

|single monthly mortality rate (SMM) |A measure of the amount of monthly principal reduction in excess of the scheduled monthly principal payment. The SMM is |

| |simply the amount of prepaid principal in a given month expressed as a percentage of the principal balance at the |

| |beginning of the month. It is not commonly quoted; however, an annualized SMM, called the constant prepayment rate or |

| |CPR, is commonly quoted. |

|single-payment loan |Another name for a time or balloon loan. A closed-end loan that does not require periodic principal payments. Instead, |

| |the full amount is due at maturity. |

|sinking fund |Cash set aside under restricted conditions as required by the terms of certain types of debt. See sinking fund bonds |

| |(sinkers). |

|sinking fund bonds (sinkers) |Revenue bond issues that require the issuer to accumulate or set aside part of the annual revenue which is then used to |

| |redeem bonds before maturity, often well before regular call dates. The set-aside funds are called the sinking fund. The|

| |quantity of bonds subject to a sinking fund call is established in a sinking fund schedule. The specific bonds that are |

| |called each year are normally chosen for redemption by the drawing of random lots. Sinking fund calls are usually at or |

| |near par. |

|SIPC |See Securities Investors Protection Corporation. |

|skew, skewness |Term used to describe an asymmetrical probability distribution. |

|skip day settlement |A phrase used to describe the agreement of a buyer and seller to exchange the security and the payment two business days|

| |after the trade date. See settlement. |

|SLMA |See Student Loan Marketing Association. |

|slow pools or slow-pay |An informal name for mortgage-backed security pools that repay slowly. |

|small business-related security |A type of security defined in Section 3(a)(53) of the Securities Exchange Act of 1934. A security that represents |

| |ownership of one or more promissory notes or leases that are evidence of the obligation of a small business concern. It |

| |does not mean a security issued or guaranteed by the Small Business Administration. |

|smoothing |Also called yield curve smoothing. The name for a set of alternative techniques for creating continuous yield curves by |

| |connecting the dots between observed. If, for example, we have observed rates for 1, 2, 3, 5 and 10 year maturities, |

| |smoothing is the technique used to infer rates for all maturities between those known points. The known points are |

| |called "knot points". The simplest smoothing technique is "linear smoothing". The most commonly used technique is "cubic|

| |splines". For forward rates, the most accurate method is called "maximum forward rate smoothing". |

|SMBS |See stripped mortgage-backed securities. |

|SMM |See single monthly mortality rate. |

|Society for Worldwide Interbank |A privately owned electronic payments system used for funds transfers between member banks. See Clearing House Interbank|

|Financial Telecommunication (SWIFT) |Payment System (CHIPS) and Fed wire. |

|soft call protection (for convertible |One of two types of call protection. Soft or provisional call protection prohibits an issuer from calling a bond issue |

|bonds) |until a certain threshold price level for the underlying stock has been reached. For example, the bond structure might |

| |specify that the bonds may be called when the closing price of the underlying stock is at least 120-150 percent of the |

| |conversion price for any 20 out of 30 consecutive trading days. Soft call provisions will be in effect for two to three |

| |years after hard call protection has expired. Soft call protection is a compromise between issuers and investors. It |

| |guarantees that the issuing company will not be able to call the bonds until the investors have achieved a certain level|

| |of profitability, but it also provides issuers with more flexibility than that available from hard call protection and |

| |allows the company to call the bonds once the bondholders have achieved a certain threshold level of returns. |

|soft costs |Soft costs are legitimate expenses incurred by a borrower or developer for things not directly reflected in the |

| |construction value of the property. |

|software |(1) A computer program, any informational content included in the program, and any supporting information provided in |

| |connection with a transaction relating to the computer program or informational content. |

| |(2) A category of personal property collateral defined by the 2001 revisions to Article 9 of the Uniform Commercial |

| |Code. |

|solvency |The condition of having sufficient funds to cover losses. In the short term, solvency is a manifestation of liquidity. |

| |Fundamentally, however, solvency is a function of capital adequacy. See insolvency. |

|solvency risk |The risk of not being able to cover losses regardless of the source, type, or size of the losses. In a broad sense, |

| |solvency is often equated with liquidity risk since ready money is needed to cover losses. However, it is more accurate |

| |to say that the ultimate source of funds available to cover losses is capital. Therefore, solvency risk is the risk that|

| |the bank will default. Ultimately, it is the risk of bank failure. |

|spec |An informal lender's term for real estate projects that are built in anticipation of finding tenants; the term "spec" is|

| |lender slang for speculative. |

|special assessment bonds or notes |Municipal securities repaid from taxes that are imposed only on the individuals who are considered to directly benefit |

| |from public improvements made to a neighborhood or community within the municipality. The most common examples are |

| |school district bonds. These bonds are repaid from taxes, most often property taxes, imposed on residents served by the |

| |school district. Another example is securities issued to finance installation of a sewer system extended to a |

| |neighborhood. |

|special purpose entity (SPE) |A legal entity, sometimes a trust or a limited partnership, that is created solely for the purpose of holding assets. |

|special purpose vehicle (SPV) |(1) The SPV may be used to obtain "off balance sheet funding" by obtaining secured loans backed by its assets. GAAP |

| |accounting rules may permit the assets and liabilities of the SPV to be unconsolidated and therefore off the balance |

| |sheet of the entity that generated the assets. |

| |(2) The SPV may issue securities backed by its assets. In a typical collateralized debt obligation, the underlying |

| |assets are owned by a special purpose vehicle. The SPV then issues different classes of securities with different risk |

| |characteristics. Note that the term "CDO" may be used to refer to the SPV or to the securities that are issued by the |

| |SPV. |

|special tax bonds or notes |Municipal securities that are repaid solely from specific taxes. These taxes are typically excise taxes imposed upon |

| |purchases of items such as gasoline, tobacco products, or liquor. Only the revenue collected from that specific tax is |

| |available to pay interest and principal due for the securities. |

|speed |The rate at which an MBS prepays. An MBS with little or no prepayments is said to have a slow speed. An MBS with |

| |significant prepayments is said to have a high speed or to be speeding. Since pools that prepay faster than anticipated |

| |can perform much worse than investors hoped, investors only half jokingly say that speed kills. See CPR, prepayment |

| |estimate and PSA for information about measures of speed. |

|split-term amortization |An amortization schedule that has periodic payments inconsistent with the maturity date of the debt. For example, a 5/10|

| |amortization schedule requires payments just large enough to fully amortize the debt in 10 years together with a final |

| |maturity date only 5 years in the future. Split-term amortization schedules result in balloon payments at maturity. |

|spot delivery |The transfer of financial instruments or commodities upon purchase. |

|spot market |Market for the purchase or sale of financial instruments, commodities, or other assets for cash settlement and |

| |immediate, as opposed to future, delivery. Also called the cash market. |

|spot price |The price available in the spot market. |

|spot rate |The rate available in the spot market as opposed to forward rates. |

|spot yield curve |See yield curve. |

|spread |(1) noun — The difference between two prices or two rates. Different users have many different and highly specific |

| |usages of this term. For example, traders use spread to mean the difference between bid and asked prices for a security.|

| |Underwriters use spread to mean the difference between the price realized by the issuer and the price paid by the |

| |investor. Bank analysts use spread to mean the difference between the average rate paid on a bank’s assets and the |

| |average rate paid on the bank’s liabilities. (In connection with the use of the term spread by bank analysts, see net |

| |interest margin. In ALM, when spread is used as a noun it most often refers to the difference between two rates or |

| |yields. |

| |(2) noun — Financial analysts, credit analysts, and lenders use the term spread to refer to a financial statement that |

| |has been converted to a standard format for purposes of analysis or comparison. (3) verb — In ALM, most often means the |

| |disaggregation of a quantity. For example, the total amount of certificates of deposit on a bank’s balance sheet may be |

| |spread into different time interval buckets on a gap report. |

| |(4) verb — The process of reformatting financial statements for the purposes of analysis or comparison. |

|spread lock |A contract that guarantees the ability to enter into an interest rate swap at a predetermined rate above some benchmark |

| |rate. |

|spread-over Treasuries |The difference between the bond equivalent yield for any investment and the bond equivalent yield for a Treasury |

| |investment with the same maturity. Comparisons of the returns for most fixed-income investments are typically made using|

| |spread over Treasury values. Investments of the same type but different maturities as well as different types of |

| |investments can be readily compared in this manner. For example, one MBS may offer a bond equivalent yield that is 20 |

| |basis points above Treasury yields while another may offer a 40 basis point spread. |

|spread risk |See basis risk. |

|spreader clause |A provision in a mortgage or security agreement that attempts to extend the security interest granted to the creditor to|

| |cover not only the described debt but also all other present and future indebtedness of the debtor. |

|spreads and spreading |Bankers almost always change the format of the borrower's financial statements to a standard format used by the bank in |

| |order to facilitate both analysis and comparisons. The process of restating the format is usually called spreading and |

| |the reformatted reports are often called spreads. |

|SRA |See Senior Residential Appraiser. |

|staff appraiser |An individual qualified under Federal rules to perform real estate appraisals who is employed by and performs appraisals|

| |for the financial institution contemplating the extension of credit to be secured by the property to be appraised. The |

| |opposite of a fee appraiser. |

|stage payments |Advances made under construction loans when the loan proceeds are disbursed only as specific construction tasks are |

| |completed. For example, a portion of the loan proceeds may be disbursed after the foundation is poured. Construction |

| |lenders often disperse funds in 4 or 5 stages; however, as many as 10 stages are common. |

|standard deviation |A statistical measure of the extent to which measurements vary from their mean. A quantification of the dispersion for a|

| |set of data. For example, if the high temperature each day in one four-day period was 70 degrees, 71 degrees, 69 |

| |degrees, and 70 degrees, that four-day period has a mean (average) high temperature of 70 degrees. A second four-day |

| |period might have high temperatures of 70 degrees, 60 degrees, 80 degrees, and 70 degrees. That second period also has |

| |an average high temperature of 70 degrees. Even though both four-day periods had the same average high temperature, they|

| |were quite different. In the first period, the standard deviation is quite small. There is little dispersion. In the |

| |second period, the standard deviation is much larger. |

|standard mortgagee clause |A provision in a hazard insurance contract stipulating that in the event of a loss, proceeds will be paid to a secured |

| |party. Usually used when the insured property is real property. Includes personal property that is insured as contents |

| |of the insured real property. Sometimes referred to as simply a mortgagee clause, the standard mortgagee clause is |

| |actually a much broader, stronger type of insurance policy stipulation. Under the standard mortgagee clause, the secured|

| |party is protected against any act or neglect of the insured that may otherwise invalidate the policy for the owner. For|

| |example, if an insured burns down his insured property, his arson may void his insurance coverage, but it does not |

| |invalidate the insurance protection provided to his secured lender. Sometimes called a New York mortgagee clause. See |

| |mortgagee clause. |

|Standardized Approach |One of three methods for quantifying capital required for operational risk under proposed Basel II capital rules. Banks |

| |using the Standardized Approach must hold capital for operational risk based the gross income for each of eight |

| |separate, defined lines of business. See also Advanced Measurement Approaches, basic indicator approach and operations |

| |risk. |

|standby letter of credit |An obligation issued by a bank on behalf of a bank customer to a third party. A standby letter of credit is a bank |

| |promise to pay the third party in the event of some defined failure by the bank’s customer, usually, but not always, a |

| |failure to pay. Standby letters of credit are often used as credit enhancements for securities issued by bank customers.|

|standby liquidity |Liquidity held for liquidity contingency risk. Also called prudential liquidity. |

|stated delay |See delay days. |

|statement of financial accounting |A ruling issued by the Financial Standards Accounting Board (FASB) covering a particular topic. Usually, these |

|standards (SFAS or FAS) |statements are referenced with the acronym FAS followed by the numeral for a specific statement. For example, FAS 119 |

| |covers disclosures required for holdings of derivatives. See FAS [numeral] for more information on specific accounting |

| |rulings. |

|statement savings account |A savings account which does not provide the depositor with a passbook. Instead, the depositor receives a monthly or |

| |quarterly statement from the bank. |

|static gap analysis |Gap analysis method that measures exposure to interest rate risk based solely upon the assets and liabilities held by |

| |the bank at the time that the analysis is performed. The opposite of dynamic gap analysis. |

|static spread |(1) The difference between two values at a single point in time. For example, the difference between two yields. |

| |(2) The calculated spread over the Treasury yield that the investor would realize from all of the cash flows produced by|

| |his investment if it is held to maturity. Those cash flows are each compared to the Treasury spot rate curve. Because |

| |the cash flows from a security are each compared to the Treasury yield curve, the static spread is a spread over the |

| |entire curve. Each of the cash flows from a bond is discounted to a present value using the spot Treasury rate with the |

| |same maturity as the cash flow. Those present values are then totaled. The static spread amount must be added to the |

| |discount rates obtained from the Treasury spot curve so that the sum of the discounted cash flows equals the bond's |

| |price. |

|statutory lien |A lien created by either federal or state legislatures or through court rulings. For example, a lien that banks are |

| |given against a borrower’s deposits. See consensual lien and judicial lien. |

|steep yield curve |See yield curve slope. |

|step-ups |A form of callable security for which the coupon rate increases if the security is not called. |

|sticky |(1) A term used by economists to describe changes in dependent variables that tend to lag behind changes in the |

| |independent variables with which they are associated. For example, time lags are known to exist between changes in |

| |prevailing interest rates and changes in the rates offered on bank core deposit products. But they are sticky. Almost |

| |all banks are able to change the rates paid on their administered-rate deposit products after rates for money market |

| |instruments have already changed. |

| |(2) An informal term used to describe the propensity of a deposit of indeterminate maturity to remain a stable source of|

| |funding. |

|stochastic |A term used to describe outcomes based on uncertain relationships. The process of change in a variable resulting from |

| |change in a parameter. For example, option adjusted spread measures of yield and Monte Carlo models of interest rate |

| |risk are stochastic measures. A method of modeling changes that allows for a range of possible outcomes. Sometimes |

| |called probabilistic. The opposite of deterministic. |

|stock power |A document assigning ownership of stock. |

|straddle |An options trading strategy involving the purchase of an equal number of put and call options for the same underlying at|

| |the same strike price and with the same maturity. An options trade designed to profit from an increase in the volatility|

| |of the price for the underlying. |

|straight-line depreciation |A method for achieving periodic reductions in the book value of fixed assets in which each periodic reduction is the |

| |same amount as every other reduction for the same asset. |

|strangle |A trading strategy using options that is designed to profit from material increases in the volatility of the underlying.|

| |Similar to a straddle but using only put and call options with strike prices that are out of the money. |

|strategic risk |One of nine risks defined by the Office of the Comptroller of the Currency. The risk to earnings or capital arising from|

| |a bank’s adverse business decisions or improper implementation of those decisions. |

|strategic trading |See proprietary trading. |

|street |A colloquial expression used to describe Wall Street investors or the community of dealers. For example, the street |

| |consensus of prepayment speeds is the average forecast of prepayment speeds from major mortgage-backed securities |

| |dealers. |

|street name |A name used by a broker or bank as the legal owner of a security actually owned by a client or customer. The true owner |

| |is called the beneficial owner. Street names are often assumed names or partnership names used by banks and brokers. |

|stress test |A multivariate test of a specific scenario at a specific stress level. Not to be confused with single variant testing of|

| |variables in a projection or forecasted scenario. See sensitivity test. |

|stress testing |Usually called stress testing but also known as stress analysis or stress scenario analysis. Modeling a series of |

|stress analysis |unusual, hypothetical events or scenarios. Stress tests may model the impact of extreme market conditions, or they may |

|stress scenario |model the change in the measured amount of value at risk (VAR) that occurs when simulation assumptions are pushed to |

| |extremes. For example, stress tests for correlation measures of VAR include simulations in which the correlations are |

| |assumed to change dramatically. See value at risk (VAR). |

|stressed PAC |A planned amortization class (PAC) CMO tranche in a CMO experiencing rapid prepayments of underlying collateral. The PAC|

| |tranche is still performing within expected ranges, (i.e., it is not a busted PAC); however, the support tranches are |

| |under strain. A stressed PAC will become a busted PAC if the prepayments continue at or near their current speed. See |

| |busted PAC. |

|strike price |See exercise price. |

|stripped mortgage-backed securities |Mortgage securities that separate principal and interest payments from the underlying mortgage-backed securities. SMBSs |

|(SMBSs) |can take four forms: interest-only strips, called I/O strips; principal-only strips, called P/O strips; discount strips;|

| |and premium strips. I/O and P/O strips are the more common of the four. Today, REMIC CMOs are used far more frequently |

| |than SMBSs to create securities with the same cash flow characteristics. |

|strips |Principal and interest cash flows due from any interest-bearing securities can be separated into different financial |

| |instruments. This is done by stripping each coupon payment from the underlying investment to create a separate security.|

| |For example, a 5-year note can be separated into 11 pieces: 10 semiannual coupon payments and the final principal |

| |payment. Each of these 11 pieces is a separate cash flow that can be purchased or sold just like a Treasury bill. The |

| |cash flows are sold at a discount. The amount of the discount and the time until the cash flow is paid determine the |

| |investor's return. |

|structural liquidity |A term used to refer to the liquidity available to a financial institution from its current positions - principally its |

| |unpledged marketable assets and its holdings of term liabilities with long remaining lives. |

|structured finance |A general term used to describe either the practice or the result of creating securities by repackaging cash flows from |

| |financial contracts. Examples include MBSs, CMOs, ABSs, and CDOs. |

|structured notes |The broad, regulatory definition of this term is debt securities whose cash flow characteristics (coupon, redemption |

| |amount, or stated maturity) depend upon one or more indices and/or that have embedded forwards or options. For example, |

| |since the early 1990s, U.S. government agencies have been issuing unsecured bonds and notes with coupons that are fixed |

| |for a predetermined time and then increase or step up to a higher amount if the securities are not called. Embedded |

| |forwards and options in the structure of notes allow underwriters to create an unlimited number of risk/reward profiles |

| |and to customize risk characteristics to fit an investor’s desired risk exposure. By this broad definition, structured |

| |notes include all CMOs. However, the term also includes a variety of other securities that are not necessarily mortgage |

| |related. In fact, many structured notes are not mortgage backed and some definitions of this term explicitly exclude |

| |mortgage-backed securities. Sometimes called hybrid securities. |

|Student Loan Marketing Association |A U.S. government sponsored, privately owned corporation that provides liquidity for student loans and for the credit |

|(SLMA) |needs of students. Informally but widely known as Sallie Mae. |

|subordinate debentures |A type of corporate bond for which the indenture covenants provide that some of the company's debt has a lower priority |

| |than other debts in the event of a liquidation. For example, some bonds may be subordinate to others. Subordinate bonds |

| |are usually unsecured. Unsecured subordinate bonds may be referred to as subordinate debentures. |

|subordinate, subordinated, subordination|Debts or claims that have a lower status or priority than other debts or claims are subordinate. For example, creditor A|

| |may agree in a subordination agreement to have its claims on the cash flow or on the assets of a borrower lower in |

| |priority than (i.e., subordinate to) the claims to that cash flow or collateral by creditor B. In finance and |

| |accounting, the term also refers to debts that include provisions making them subordinate to other liabilities. For |

| |example, a bond issue may, by contractual agreement, be subordinate to all other bonds issued by a company. |

|subordination and attornment agreements |Documents used in commercial mortgage transactions in which the mortgaged property is leased by the borrower to tenants.|

| |The agreement is executed by the tenants in favor of the lender. By executing the agreement, the tenant/lessee agrees to|

| |subordinate its lease to the mortgage that the borrower/lessor is granting to the lender. These agreements give the |

| |lender more rights and more flexibility for disposing of the property in the event that the borrower defaults. |

|subsidiary |A separate corporation that is owned by another corporation. |

|subsistence certificate |A written form prepared by a state office or officer attesting to the fact that a named corporation is in good standing |

| |in that state. |

|suitability |A term used in the securities industry to describe the match between the risk characteristics of any investment and the |

| |investment needs, risks awareness and risk appetite of any buyer. Brokers and dealers have substantial legal and ethical|

| |responsibility to make sure that what they sell is suitable for each buyer. |

|summary appraisal report |One of three types of real estate appraisal reports defined under Uniform Standards of Professional Appraisal Practice |

| |rules. A summary appraisal report provides the middle level of detail of the three report formats. |

|super floater |Floating rate CMO tranches that have coupon rates that are determined by formulas such that the interest rate paid is a |

| |multiple of an underlying rate minus a stated spread. For example, a superfloater may pay interest at the rate of 3 |

| |times 1-month LIBOR minus 16 percent. In this example, if 1-month LIBOR is 5 percent, then the coupon rate for this |

| |super floater might be a negative 1 percent. However, to prevent the possibility of negative interest rates, super |

| |floaters often have floors. Super floaters are more desirable in high or rising rate environments. |

|super PO |A principal-only security structured as a companion bond. |

|Superfund Act |See Comprehensive Environmental Response, Compensation, and Liability Act of 1980. |

|super-generic description |A collateral description in a security agreement, financing statement, or other loan document that is very broad and |

| |does not specifically list individual items of collateral, for example, "All of the Borrower’s Assets." |

|support tranche |See companion tranche. |

|supporting obligation |A letter of credit right or secondary obligation that supports the payment or performance of an account, chattel paper, |

| |document, general intangible, instrument, or investment property. A category of personal property collateral defined by |

| |the 2001 revisions to Article 9 of the Uniform Commercial Code. |

|surety |Generally the same as guarantor; however, in some states there are important distinctions. |

|survey |A precise physical determination of the location and boundaries of real property. Surveys are performed by qualified |

| |experts called surveyors. Survey findings are reflected in documents called surveys, survey reports, or certificates of |

| |survey. For unplatted land, the survey determines the location of the property with reference to known points. For all |

| |land, the survey shows the dimensions of the property, the location of improvements (such as buildings), and the |

| |dimensions of the improvements. Lenders use surveys to verify the legal description of property, to verify that the |

| |property discussed in appraisal reports is identical to the property owned by the borrower, and to verify that |

| |driveways, terraces, garden walls, and other structures do not cross property lines. |

|Suspicious Activity Report (SAR) |All financial institutions operating in the United States, including insured banks, savings associations, savings |

| |association service corporations, credit unions, bank holding companies, non-bank subsidiaries of bank holding |

| |companies, Edge and Agreement corporations, and U.S. branches and agencies of foreign banks are required to make this |

| |report following the discovery of: insider abuse involving any amount, violations aggregating $5,000 or more where a |

| |suspect can be identified, violations aggregating $25,000 or more regardless of a potential suspect, or transactions |

| |aggregating $5,000 or more that involve potential money laundering or violations of the Bank Secrecy Act. Casinos must |

| |file an SARC Form and Securities Brokers and Dealers are required to file an SAR-S Suspicious Activity Report. See also |

| |Bank Secrecy Act. |

|sustainable growth rate |One term used to describe the maximum rate at which a firm's sales can grow without straining the capacity of the firm's|

| |financial condition. This term is closely associated with a formula of the same name. |

|SVA |See shareholder value added. |

|swap |(1) The sale of one or more securities in order to purchase one or more different securities with the proceeds from the |

| |sale. Bond swaps are usually done to take advantage of changes in market conditions or more favorable investment |

| |characteristics. For example, swaps are often done to lengthen or shorten maturities when investors change their outlook|

| |for future rates. |

| |(2) A financial instrument representing a transaction in which two parties agree to swap or exchange some obligation. |

| |Swaps began with currency swaps, but the idea quickly spread to interest rate exchanges. In an interest rate swap, one |

| |party agrees to swap fixed-rate loan payments with the floating-rate payments of the other party. Interest rate swaps |

| |are often used in hedging. See interest rate swap. |

|swap curve |The yield curve of interest rate swap rates from 1 week to 30 years. See yield curve. |

|swaption |An option to enter into a swap. A payer or put swaption is the option to enter into a pay fixed/receive floating swap. A|

| |receiver or call swaption is the option to enter into receive fixed/pay floating swap. |

|sweep account |A deposit account, usually at a bank, that periodically removes a portion of the customer’s funds into a higher yielding|

| |instrument. Bank sweep accounts are often sold as cash management tools. With a bank sweep account, idle funds are swept|

| |each night from a transaction account into a higher-yielding, overnight investment. Some banks offer sweep accounts that|

| |only remove excess balances weekly. Brokerage firms offer sweep accounts as well with weekly or monthly sweep |

| |frequencies. |

|SWIFT |See Society for Worldwide Interbank Financial Telecommunication. |

|symmetric |Behavior exhibited by financial instruments whose rates or values move linearly with respect to changes in market rates.|

|syndication |An arrangement in which two or more banks lend directly to the same borrower pursuant to one loan agreement. Each bank |

| |in the syndicate is a party to the loan agreement and may receive a note from the borrower evidencing the debt. Banks |

| |involved in syndicated transactions often sell some or all of their allotment in the credit facility. |

|synthetic CDO |A CDO that uses credit default swaps rather than actual corporate obligations to create a pool of credit exposure. See |

| |collateralized debt obligation (CDO). |

|synthetic hedges |A somewhat out-of-date term for capital markets hedges. Hedges that use derivatives. |

|systemic liquidity risk |Liquidity risk arising from causes external to the entity. Systemic liquidity requirements can take a number of forms: |

| |(1) Macro economic corrections. These may be recessions or credit crunches. They may be national or regional in scope. |

| |(2) Capital markets disruptions. These types of liquidity crises are more common. An excellent recent example is the |

| |flight to quality that occurred in August and September of 1998 after the collapse of the Russian ruble and the rescue |

| |of a highly leveraged hedge fund. |

| |(3) Payments systems disruptions. Banks are heavily dependent upon a few national and international data systems for |

| |transferring funds. A disruption in one of these systems can easily and quickly cascade into a major systemic problem. |

T

|TAC tranche |See targeted amortization class tranche. |

|takedown period |A time period during which a borrower is permitted to draw down (i.e., request and receive advances from) the proceeds |

| |of a loan. |

|takeout commitments |Legally binding commitments made by end lenders to construction lenders. The end, or permanent, lender commits to |

| |providing financing to the property owner that will pay off the construction loan. End lenders may be banks, insurance |

| |companies, pension funds, or others. Also see permanent lender. |

|TAN |See tax anticipation notes. |

|tangible equity or tangible net worth |Terms used to describe the amount of owners' or stockholders' equity after deduction of intangible assets. Total assets |

| |minus intangible assets minus total liabilities. |

|targeted amortization class (TAC) |Bonds created in scheduled-pay CMO structures. A TAC tranche is structured to avoid prepayment volatility. Each TAC has |

|tranche |a designated target speed. When prepayments exceed the targeted speed, the excess cash flow is diverted to other |

| |tranches in the CMO. Unlike a planned amortization class (PAC) tranche, a TAC tranche is not protected from extension |

| |risk if prepayments are slower than expected. For this reason, TACs can be viewed as half PACs. TACs offer investors |

| |protection (but not immunity) from call risk but no protection from extension risk. |

|tax and revenue anticipation notes |Short-term notes sold by a public entity that will be repaid from the proceeds of anticipated tax and/or fee |

|(TRAN) |collections. |

|tax anticipation notes (TAN) |Short-term notes sold by a public entity that will be repaid from the proceeds of anticipated tax collections. |

|taxable equivalent yield (TEY) |The yield that a tax-free investment would provide to an investor if the tax-free yield was "grossed up" by the amount |

| |of taxes not paid. This is the most common way of comparing yields on taxable and tax-free investments. Instead of |

| |reducing a taxable yield by the amount of applicable taxes to compare it with a tax-free yield, the tax-free yield is |

| |increased by a hypothetical amount of income tax. |

|TB-13 |See Thrift Bulletin 13. |

|TBA |Acronym for to be announced. Most new MBS pass-through bonds can be purchased on a TBA basis. |

|teaser |A teaser rate is a below-market interest rate offered to borrowers of adjustable-rate loans during the initial period of|

| |some adjustable-rate mortgages. A teaser period is the period of time during which the teaser rate applies. |

|technical review |One of two types of real estate appraisal reviews. A technical review is a review performed by another appraiser. The |

| |primary purpose of the technical review is to determine whether or not the appraisal meets Uniform Standards of |

| |Professional Appraisal Practice requirements and whether the opinions and conclusions in the report are reasonable. |

| |Technical reviews ordinarily do not challenge the original appraiser’s choice of comparables unless there is an obvious |

| |problem. See administrative review. |

|TED spread |The difference between U.S. Treasury bill yields and yields for Euro deposit contracts of the same maturity. The TED |

| |spread is used as a measure of investor confidence. When the spread is small, investors are not requiring a large amount|

| |of additional compensation for the additional risk of Euro deposits. When the spread is large, investors are willing to |

| |give up yield to obtain the higher quality of U.S. Treasury bills. A sudden widening of the TED spread is indicative of |

| |a flight to quality. See quality spread. |

|tenant acceptance letters or tenant |See estoppel letter. |

|estoppel letters | |

|10-K and 10-Q |Financial reports that must be filed by publicly traded corporations with the Securities and Exchange Commission (SEC). |

| |The quarterly reports are called 10Qs. The annual reports are called 10-Ks. Both must follow proscribed formats. |

|term fed funds |Federal funds transactions made for tenors longer than one day. Typical term fed funds transactions range from a few |

| |days to a few months. |

|term insurance |A form of life insurance that has no built-in savings feature and does not accumulate any cash surrender value. |

|term note |(1) A name used to describe a promissory note used for any closed-end loan granted for a predetermined amount of time |

| |(e.g., short-term, medium-term or long-term). |

| |(2) A name used in business or commercial lending to describe a promissory note that calls for mostly regular, periodic |

| |payments of principal and interest. |

|term structure model |Also known as yield curve models. An assumption, or set of assumptions, used to describe future changes in interest |

| |rates over a range of maturities. The most simple term structure model is a parallel shift in rates, e.g. all rates rise|

| |by 1 percent. Implied forward rates may be the most common term structure model. More accurate models provide a |

| |systematic way to assume the random movement of the interest rates along the yield curve. These models constrain the |

| |range of movement of the rates, and the corresponding probabilities such that they are (i) internally consistent, that |

| |is, there is no riskless profitable arbitrage, and (ii) externally consistent, that is, the values of certain securities|

| |implied from the model agree with the market values. The following five term structure models are the most systemic and |

| |accurate: Vasicek, Extended Vasicek (Hull and White), Ho and Lee, Heath, Jarrow and Morton (constant volatility), and |

| |Heath, Jarrow and Morton (declining volatility). |

|term structure of interest rates |The relationship between interest rates (or yields) for otherwise similar securities with different maturities. Yield |

| |curves are graphical depictions of the term structure of interest rates. |

|termination |The action taken by a secured party to end or give up its interest in collateral. For personal property collateral, a |

| |termination may be entered into the public record by using a standard form called a UCC-3. |

|termination date |The date on which cash flows due under a swap contract cease to accrue. |

|TEY |See taxable equivalent yield. |

|theta |The Greek letter used in the financial industry to represent the amount by which the price of an option changes for each|

| |one-day decrease in the time remaining until its expiration. |

|Thrift Bulletin 13 (TB-13) |A rule published by the Office of Thrift Supervision (OTS) entitled Responsibilities of the Board of Directors and |

| |Management with Regard to Interest Rate Risk. This rule governs the measurement and management of interest rate risk at |

| |all insured savings and loan associations. |

|tier 1 capital |A regulatory definition of bank capital. Tier 1 capital consists of common shareholders’ equity, perpetual preferred |

| |shareholders’ equity with noncumulative dividends, retained earnings, and minority interests in the equity accounts of |

| |consolidated subsidiaries. |

|tier 2 capital |A regulatory definition of bank capital. Tier 2 capital consists of subordinated debt, intermediate-term preferred |

| |stock, cumulative and long-term preferred stock, and a portion of the bank’s allowance for loan and lease losses. |

|TIGRS |A proprietary name for a zero coupon Treasury security created from a coupon-bearing Treasury security. |

|time bands |See buckets. |

|time deposit |A deposit with a specific maturity. Usually, but not always, a certificate of deposit. |

|time draft |A draft that is payable on a future date. |

|time note |A name used to describe a promissory note used for closed-end transactions that do not require any principal to be |

| |repaid until the maturity of the note. Interest may or may not be due periodically prior to maturity. Time notes are |

| |usually for periods of time no greater than one year. |

|time value |The portion of an option’s value imputed to the possibility that the price of the underlying will move in the option |

| |holder’s favor during the time remaining before the option expires. |

|times interest earned |See interest-coverage ratio. |

|TIPS |See Treasury inflation-protected securities. |

|title insurance |An insurance policy that insures that the ownership of a parcel or parcels of real property and the lien priority of |

| |secured creditors with an interest in that property is as the title insurance policy states. The insured party protected|

| |by the title insurance policy may be the property owner, in which case the policy is called a owner’s policy, or the |

| |lender, in which case the policy is called a lender’s policy. |

|title insurance commitment |A preliminary report prepared by a title insurance company and submitted to a potential secured party prior to a loan |

| |closing. The commitment shows the information and conditions that will appear on the final title insurance policy unless|

| |changes are made in the chain of title or in the outstanding liens prior to the issuance of the final policy. |

|title opinion |A document prepared by an attorney that states ownership and a brief report of lien priority for a designated parcel of |

| |real property. The opinion is usually given in a letter written on the attorney’s letterhead stationary. It includes the|

| |date and time of the record investigation. Also called attorney’s certificate of title or certificate of title. |

|title search |A report prepared by a title insurance company that indicates the ownership and outstanding liens for a designated |

| |parcel or parcels of real property. Even though a title search is prepared by a title insurance company, it does not |

| |offer any insurance protection. Also called ownership and encumbrance reports. |

|toggle tranche |See jump Z tranche. |

|tombstone |The informal name for a published notice listing the major participants in a syndicated loan or newly issued security. |

|tort |A legal term for a wrongful act that results in an injury or damages to another person or entity that is not contractual|

| |in nature. See commercial tort claim. |

|total return analysis |A methodology for calculating an investor's return from an investment. In total return analysis, the investor's returns |

| |from interest income paid on the invested principal plus interest income earned from the successive reinvestment of |

| |previously earned interest on that investment is combined with projected capital gains or losses. Total return differs |

| |from yield-to-maturity first because it can include gains or losses from sales prior to maturity and second because it |

| |permits the assumption of a reinvestment rate different from the yield earned on the underlying principal. |

|total return swaps |A type of credit derivative instrument. Swap contracts in which the protection buyer sells the total return from a |

| |particular reference asset such as a corporate loan or bond. In exchange, the protection buyer receives a rate of |

| |interest such as LIBOR. Alternatively, the protection buyer may agree to receive the total return from a different |

| |reference asset. (In the first case, the protection buyer has reduced credit risk by taking a rate such as LIBOR and |

| |giving up the cash flow from a reference asset with credit risk. In the second case, the protection buyer is |

| |diversifying credit risk by exchanging the risk from one obligor for the risk for another obligor.) Note that in a total|

| |return swap, the support seller is guaranteeing not just against default by the reference obligor but also against the |

| |deterioration in the credit quality of the reference obligor even if there is no default. "Total return" includes |

| |interest payments and changes in the market value of the reference asset. As a result, the total return of a credit |

| |asset can be affected by various factors, some of which may be quite extraneous to the asset in question, such as |

| |interest rate movements, exchange rate fluctuations etc. Also known as a total rate of return swap or TROR swap. |

|total risk-based capital |A regulatory definition of bank capital. The sum of tier 1 plus tier 2 capital. |

|TRACE |Trade Reporting and Compliance Engine. A public reporting service operated by NASD that provides real time price |

| |information for over-the-counter trades of eligible corporate bonds. |

|trade credit |Credit granted by a supplier to a customer to finance the customer’s purchase of goods or services from the supplier. |

|trade date |The day on which a buyer and seller agree upon a transaction. |

|trade letter of credit |An obligation issued by a bank on behalf of a bank customer to a third party. A commercial or trade letter of credit is |

| |a bank promise to pay the third party for the purchase of goods by the bank’s customer. If the bank’s obligation to pay |

| |is not immediate, the transaction can later give rise to a banker’s acceptance. See letter of credit and banker's |

| |acceptance. Also called commercial letter of credit. |

|trade name |Name used by a proprietorship, partnership, or corporation to conduct business that is different from the legal name of |

| |the proprietorship, partnership, or corporation. |

|trade receivables |Also known as accounts receivable - trade. Amounts due from the sale of goods or service on credit that are not |

| |evidenced by promissory notes. |

|trading |(1) The activity of buying and selling financial instruments or commodities for profit. Individuals or entities may |

| |engage in trading either strictly on their own behalf or for current or future transactions with customers. Trading |

| |profits may come from market price changes but may also come from the spreads between bid and asked prices or from |

| |customer markups. Trading is distinct from investing, although trading activities are not always easy to distinguish |

| |from investing activities. In trading, the profit goal is almost always short term. Unlike trading, investing is |

| |generally longer term and may even include the intent to hold the instrument to maturity. A common misconception is that|

| |trading activities are speculative while investing activities are not. Trading may indeed include highly speculative |

| |transactions. However, trading may also include relatively low-risk transactions such as matched trading or arbitrage. |

| |Like investing, trading may involve either cash or derivative instruments. Trading transactions may involve cash and/or |

| |futures positions. |

| |(2) One of three defined categories established in FAS 115 for the classification of financial instruments held as |

| |assets on the books of an investor. Trading securities are those owned by investors engaged in trading activities |

| |including short-term speculation. Under FAS 115, trading assets must be reported at their market values. FAS 115 also |

| |includes provisions that restrict investors’ ability to transfer assets from the trading category to available-for-sale |

| |(AFS ) or held-to-maturity (HTM). Also see available-for-sale, FAS 115 and held-to-maturity. |

|trading as (T/A) |Designation, usually following a name, indicating that a name used by a business is not the legal name of the entity |

| |doing business but is an assumed name or trade name instead. |

|TRAN |See tax and revenue anticipation notes. Also see tax anticipation notes and bond anticipation note. |

|tranche |A segment or tier within a loan or security. Also known as a class. For example, collateralized mortgage obligations |

| |(CMOs) are securities for which the cash flows are segregated into tranches and sold separately. Each tranche is a |

| |separate security with its own maturity date and interest rate. CMOs may have over a hundred tranches or classes. |

| |Tranche is the French word for slice. Tranches are used to reallocate principal and interest cash flows so that some |

| |classes have lower risk while some have higher risk. See waterfall. |

|transaction risk |One of nine risks defined by the Office of the Comptroller of the Currency. The risk to earnings or capital arising from|

| |problems with service or product delivery. The Federal Reserve and most banks refer to this risk as operations or |

| |operational risk. |

|transit item |A check deposited and processed for collection that is drawn on another bank. |

|transit routing number |A nine-digit number contained in the MICR line of each check. The routing number identifies the paying bank. |

|transition asset |An off-balance sheet asset created under FAS 87 rules when pension plan assets exceed the projected benefit obligation |

| |(PBO) at the date that FAS 87 rules are implemented. The amount of the off-balance sheet asset is the amount of the |

| |excess. This asset is amortized - usually over the projected remaining service lives for employees expected to receive |

| |benefits. The amortization reduces the reported benefit expense of the sponsoring firm. The unamortized remaining |

| |balance of the transition asset is disclosed in a footnote to the financial statements as unrecognized initial net gain.|

|transition obligation |An off-balance sheet liability created under FAS 87 rules when the PBO exceeds the amount of pension plan assets as of |

| |the date that FAS 87 rules are implemented. The amount of the off-balance sheet liability is the amount of the |

| |shortfall. This liability is amortized - usually over the projected remaining service lives for the employees expected |

| |to receive benefits. The amortization increases the reported benefit expense of the sponsoring firm. The unamortized |

| |remaining balance of the transition obligation is disclosed in a footnote to the financial statements as unrecognized |

| |initial net loss. |

|Treasuries |An informal name for securities issued by the United States Department of the Treasury. |

|Treasury bills |Short-term obligations issued by the U.S. Treasury. Bills are issued for maturities of one year or less. They do not pay|

| |interest but are issued on a discount basis instead. |

|Treasury bonds |Long-term obligations issued by the U.S. Treasury. Bonds are issued for initial maturities greater than ten years. |

|Treasury inflation-protected securities |Securities issued by the U.S. Treasury that provide inflation protection to investors. These securities have a fixed |

|(TIPS) |coupon rate and maturity date. However the interest payment is based on a principal amount that is adjusted semiannually|

| |to reflect changes in the Consumer Price Index (CPI). |

|Treasury notes |Medium-term obligations issued by the U.S. Treasury. Notes are issued for initial maturities from over one year to ten |

| |years. |

|treasury stock |The name for shares of a corporation's stock that were issued and then subsequently repurchased by the corporation. |

|triple net |An expression used to describe real estate leases that require utilities, insurance, and taxes to be paid by tenants. |

|triple tax exempt |A phrase used to refer to municipal securities that are exempt from federal, state, and local income taxes. |

|true consignment |A transaction in which a person delivers goods to a merchant for the purpose of sale, and the merchant deals in goods of|

| |that type under a name other than that of the person delivering the goods. |

|true lease |A legal term for a transaction that is intended by the parties to be an actual lease of personal property rather than a |

| |conditional sale. |

|true yield |A seldom-used term meaning the simple interest yield for an investment maturing in one year or less. In calculating true|

| |yield, the actual number of days in the year (365) is divided by the actual number of days that the investment income is|

| |earned. |

|Truth-in-Lending Act |A Federal statute that governs a number of practices related to bank loans - especially, but not only, consumer loans. |

| |The Federal Reserve Board of Governors has adopted Regulation Z to implement this statute. The regulation has specific |

| |requirements giving some borrowers the right to rescind certain loans and very specific requirements about how banks |

| |must disclose rescission rights. The regulation also includes very detailed requirements for calculating and disclosing |

| |annual percentage rates for many loans. See annual percentage rate and rescission. |

|turnover or turns |Terms used to describe the number of operating cycles in a defined period of time or the length of each specific |

| |operating cycle. Typical turnover cycles are: the rate at which accounts receivable converts to cash, the rate at which |

| |inventory converts to receivables or cash, the rate at which accounts payable are paid, and the number of times in a |

| |year inventory can be said to be sold and replaced. For example, if a firm's average inventory level is equivalent to |

| |one quarter of its annual sales, it can be said that inventory turns four times a year. (See days inventory, days |

| |payables and days receivables for definitions of other common measurements of turnover.) While turnover concepts are |

| |most often applied to elements of the working capital conversion cycle, there are other applications. For example, asset|

| |turnover is the ratio of net sales divided by total assets. |

|12b-1 fee |A type of fee charged to investors in some mutual funds. In theory, the fee is supposed to reimburse the sponsor for |

| |sales, distribution, or shareholder liaison expenses. In reality, however, it is another type of administrative or |

| |management fee. See load. |

|twist risk |See yield curve risk. |

|Type I securities |A category of investment securities defined by the Office of the Comptroller of the Currency (OCC) (12 CFR 1). A Type I |

| |security is any one of the following: |

| |(1) Obligations of the U.S. government. |

| |(2) Obligations issued, insured or guaranteed by a department or an agency of the U.S. government if the obligation, |

| |insurance, or guarantee commits the full faith and credit of the United States for the repayment of the obligation. |

| |(3) Obligations issued by a department or agency of the United States or an agency or political subdivision of a State |

| |of the United States that represent an interest in a loan or in a pool of loans made to third parties,if the full faith |

| |and credit of the United States has been validly pledged for the full and timely payment of interest on, and principal |

| |of, the loans in the event of nonpayment by the third party obligors. |

| |(4) General obligations of a State of the United States or of any political subdivision. |

| |(5) Obligations authorized under 12 USC 24 (Seventh) as permissible for a national bank to deal in, underwrite, |

| |purchase, and sell for the bank’s own account, including qualified Canadian government obligations. |

| |(6) Other securities that the OCC determines to be eligible as Type I securities under 12 USC 24 (seventh). |

|Type II securities |A category of investment securities defined by the Office of the Comptroller of the Currency (OCC) (12 CFR 1). A Type II|

| |security is any one of the following: |

| |(1) Obligations issued by a State or a political subdivision or an agency of a state for housing, university, or |

| |dormitory purposes. |

| |(2) Obligations of international and multilateral development banks and organizations listed in 12 USC 24 (Seventh). |

| |(3) Other obligations listed in 12 USC 24 (Seventh) as permissible for a bank to deal in, underwrite, purchase, and sell|

| |for the bank’s own account, subject to a limitation per obligor of 10 percent of the bank’s capital and surplus. |

| |(4) Other securities that the OCC determines to be eligible as Type II securities under 12 USC 24 (Seventh). |

|Type III securities |A category of investment securities defined by the Office of the Comptroller of the Currency (OCC) (12 CFR 1). All |

| |investment securities that do not qualify as Type I, II, IV, or V. For example, obligations of corporations and |

| |municipal revenue securities other than those defined as Type II. |

|Type IV securities |A category of investment securities defined by the Office of the Comptroller of the Currency (OCC) (12 CFR 1). This is a|

| |category added in the 1996 amendments. A Type IV security is any one of the following: |

| |(1) A small business-related security as defined in section 3(a)(53)(A) of the Securities Exchange Act of 1934,15 USC |

| |78c(a)(53)(A), that is rated investment grade or is that is the credit equivalent of investment grade and that is fully |

| |secured by interests in a pool of loans to numerous obligors. |

| |(2) A commercial mortgage-related security that is offered or sold pursuant to section 4(5) of the Securities Act of |

| |1933 that is rated investment grade or that is the credit equivalent of investment grade. |

| |(3) A commercial mortgage-related security as described in section 3(a)(41) of the Securities Exchange Act of 1934, 15 |

| |USC 78c(a)(41), that is rated investment grade in one of the two highest investment grade rating categories, that |

| |represents ownership of a promissory note or certificate of interest of participation that is directly secured by a |

| |first lien on one or more parcels of real estate upon which one or more commercial structures are located, and that is |

| |fully secured by interests in a pool of loans to numerous obligors. |

| |(4) A residential mortgage-related security that is offered and sold pursuant to section 4(5) of the Securities Act of |

| |1933, 15 USC 77d(5), that is rated investment grade or is the credit equivalent of investment grade. |

| |(5) A residential mortgage-related security as described in section 3(a)(41) of the Securities Exchange Act of 1934,15 |

| |USC 78c(a)(41), that is rated investment grade in one of the two highest investment grade rating categories and that |

| |does not other wise qualify as a Type I security. |

| |See investment grade. |

|Type V securities |A category of investment securities defined by the Office of the Comptroller of the Currency (OCC) (12 CFR 1). This is a|

| |category added in the 1996 amendments. A Type V security is a security that meets the following four requirements: |

| |(1) Rated investment grade; |

| |(2) Marketable; |

| |(3) Not a Type IV security; |

| |(4) Fully secured by interests in a pool of loans to numerous obligors and in which a national bank could invest |

| |directly. |

U

|UCC |See Uniform Commercial Code. |

|UCC - 1 |See financing statements. |

|UCC - 3 |See amendment, assignment, continuation, partial release, release and termination. |

|UCC - 4 |See lien search. |

|unadvised line |A line of credit that is approved by the bank but not disclosed to the borrower until some specific event, usually a |

| |request for funding from the borrower. |

|uncertificated |Legal term used (especially in UCC Article 8) as an adjective to describe stocks, bonds, other investments, and |

| |certificates of deposit held in nonmaterial form as electronic computer entries. Ownership of these instruments is |

| |usually evidenced by a receipt or confirmation. |

|uncovered |See naked. |

|underlying or |An option or a future is a right or a commitment to buy or sell something at a future date. The underlying is the |

|underlier |financial instrument that may or must be bought or sold in each option or futures contract. FAS 133, as amended by FAS |

| |149, defines an underlying to be a specified interest rate, security price, commodity price, foreign exchange rate, |

| |index of prices or rates, or other variable (including the occurrence or nonoccurrence of a specified event such as a |

| |scheduled payment under a contract). An underlying may be a price or rate of an asset or liability but not the asset or |

| |liability itself. |

|underwriter |The investment bank, commercial bank, or brokerage firm that works with an issuer to sell a new issue. Issuers may |

| |select underwriters by obtaining bids or on a negotiated basis. Potential underwriters may form groups called |

| |underwriting syndicates to bid collectively. |

|underwriting |The name used to describe the process of analyzing and structuring a proposed loan. Good underwriting is the most |

| |important aspect of secured lending. Outside of banking, the term primarily refers to the purchase of risk. |

|undivided profits |Bank term for retained earnings. Bank profits from current as well as prior years that have neither been distributed to |

| |shareholders as dividends nor transferred to surplus. Corporate earnings accumulated over time. One of a corporation’s |

| |equity or capital accounts. See tier 1 capital and tier 2 capital. |

|unexpected loss or unexpected risk |The portion or component of risk or loss that exceeds the predicted amount. |

|unfunded pension losses |A contra equity account created under FAS 87 rules for cases in which the amount of the additional minimum pension |

| |liability exceeds the sum of unamortized prior service cost plus transition obligation. Sometimes called minimum pension|

| |liability adjustment or minimum pension liability in excess of unrecognized prior service costs. |

|Uniform Commercial Code (UCC) |A compilation of laws relating to commercial contracts involving personal property. The code does not address real |

| |property. In addition, a few types of personal property are also excluded. While the UCC has been adopted by all 50 |

| |states, there are differences among the versions adopted in each state. Secured lenders tend to focus on UCC Article 2A |

| |covering leases, Article 8 covering securities, and Article 9 covering all other personal property collateral. |

|universal life insurance |A form of life insurance that combines term insurance protection with a savings feature. The portion of the funds |

| |allocated to the savings feature is invested in a tax-deferred account that typically earns interest at rates comparable|

| |to prevailing money market interest rates. A universal insurance policy offers the policy holder the flexibility to |

| |change the amount of insurance coverage, the amount of the premium payment and/or the portion of the premium payment |

| |allocated to the savings feature. |

|Uniform Standards of Professional |Appraisal requirements published by the Appraisal Foundation. Prior to 1994, USPAP rules were included as an appendix to|

|Appraisal Practice (USPAP) |the Uniform Real Estate Appraisal Rule published by the four federal financial institution regulators. Since 1994, USPAP|

| |rules are referenced in the bank regulations but not provided in any form. Comments published with the 1994 amendments |

| |to the bank regulations indicate that readers are expected to assume that all references to USPAP in the regulations are|

| |references to the most current version of USPAP then available. |

|unlimited guaranty |A guaranty agreement that does not include any provisions restricting the amount of debt guaranteed. |

|unplatted land |Land that is not platted. Land for which the property description takes the form of a metes and bounds description |

| |rather than a lot identification. See metes and bounds and platted land |

| |. |

|unqualified opinion |Term used to describe an opinion letter accompanying audited financial statements in which the CPA states that the |

| |financial statements fairly present the financial position and the results of operations. The CPA will also state that |

| |the financial statements conform with GAAP for the present and the preceding reporting periods. |

|unrecognized initial net gain |The current unamortized balance, as of the financial statement date, of the off-balance sheet asset for the initial |

| |transition asset in a defined benefit pension plan. FAS 87 requires that this amount be disclosed in a footnote to the |

| |financial statements. See transition asset. |

|unrecognized initial net loss |The current unamortized balance, as of the financial statement date, of the off-balance sheet liability for the initial |

| |transition obligation in a defined benefit pension plan. FAS 87 requires that this amount be disclosed in a footnote to |

| |the financial statements. See transition obligation. |

|unrecognized net gain or unrecognized |An off-balance sheet asset or liability created under FAS 87 rules when plan assets in a defined benefit pension plan |

|net loss |exceed or fall short of the projected benefit obligation (PBO). The gain or loss is usually caused by actual investment |

| |returns for plan assets that exceed or fall short of expected or assumed rates of return. Gains or losses may also |

| |result from changes in actuarial assumptions. These are off-balance sheet assets or liabilities because volatile returns|

| |on plan assets realized in subsequent periods can reduce or completely offset the unrealized gains or losses that |

| |previously existed. These gains or losses are from changes in the plan or the plan assets that occur subsequent to the |

| |adoption of FAS 87 rules and should not be confused with initial transition assets, unrecognized transition assets, |

| |initial transition obligations, or unrecognized transition obligations. The amount of any unrecognized gains or losses |

| |is disclosed in a footnote to the financial statements. |

|unrecognized prior service costs |The current unamortized balance, as of the financial statement date, of the off-balance sheet liability for prior |

| |service costs in a defined benefit pension plan. FAS 87 requires that this amount be disclosed in a footnote to the |

| |financial statements. See prior service costs. |

|upstream guaranty |A phrase sometimes used to describe a guaranty of a loan to a borrowing entity when the borrowing entity is a parent |

| |company or stockholder of the guarantor. |

|upward sloping yield curve |A yield curve depicting a situation in which yields for shorter-term maturities are lower than yields for longer-term |

| |maturities. Upward sloping yield curves are common. |

|USA PATRIOT Act |An acronym for the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct |

| |Terrorism Act of 2001, ("USA PATRIOT Act"). The USA PATRIOT Act substantially amends the Bank Secrecy Act of 1970 (BSA).|

| |The statute contains strong measures to prevent, detect, and prosecute terrorism and international money laundering. The|

| |Act is far-reaching in scope, covering a broad range of financial activities and institutions. See Patriot Act. |

|USPAP |See Uniform Standards of Professional Appraisal Practice. |

|usury laws |State and Federal laws establishing maximum allowable interest rates that may be charged on specified types of credit |

| |extensions to specified types of borrowers |

V

|value at risk (VAR) |The amount or percentage of value that is at risk of being lost from a change in prevailing interest rates (similarly |

| |defined for things other than interest rates as well). The sensitivity of the value of a single financial instrument, a |

| |portfolio of financial instruments, or an entire entity’s balance sheet to changes in interest rates can be calculated. |

| |The resulting sensitivity is the amount of value at risk. See earnings at risk for an alternative measure of interest |

| |rate risk. VAR, sometimes called equity value at risk or EVAR, can be calculated by at least four different mathematical|

| |expresions. The simplest and least accurate measure of VAR is the difference between the calculated economic value of |

| |equity (EVE) under one projected rate scenario and the calculated EVE under a different projected rate scenario. See |

| |correlation VAR, empirical VAR and historical VAR for definitions of VAR calculated under more rigorous formulae. |

|value based management (VBM) |A structured approach to measure the performance of a firm's unit managers or products in terms of the net benefit they |

| |provide to shareholders. Usually the application of shareholder value added (SVA) metrics. See shareholder value added. |

|variable life insurance |A form of life insurance very similar to whole life insurance. In a variable life insurance policy, the cash value is |

| |invested in equity or debt securities. Policyholders can select and switch investment instruments. The policyholder |

| |bears the risk of the securities investment; the insurance company only guarantees a minimum death benefit amount. |

|variable-rate mortgage |A less common name for an adjustable-rate mortgage (ARM). |

|variance |Statistical term that quantifies the dispersion of data such as rates or prices around the mean. For example, highly |

| |volatile rates are rates that are sometimes high above the mean and sometimes way below the mean. Less volatile rates |

| |are dispersed closer to the mean and therefore have smaller variances. Similar to, but not the same as, the average |

| |amount by which data deviates from the mean for that data. |

|variance swap |A swap agreement where one party agrees to receive implied volatility and pay realized while the counterparty agrees to |

| |receive realized volatility and pay implied. |

|vector path |A series of prepayment speeds, in a sequence, that is chosen to reflect an assumed interest rate scenario. For example, |

| |if prevailing interest rates are near a cyclical low and still falling, a selected vector path might project a rate path|

| |that assumes steady or falling rates in the short run but rising rates for a year or more thereafter. A way of modeling |

| |future MBS performance with more complex assumptions than the customary single estimate of future prepayment speed. |

|vega |The change in an option’s price resulting from changes in the volatility of the price for the underlying. |

|vested accumulated benefit obligation |The portion of the accumulated benefit obligation under a defined benefit plan to which the employees have a legal right|

| |even if their employment is terminated before retirement. |

|vintage CMO |A collateralized mortgage obligation (CMO) backed by seasoned mortgage securities. |

|VIX |A measure of implied volatility published by the CBOE. |

|volatility |The rate of change in a variable. More formally, a statistical term to quantify the dispersion of variables such as |

| |rates or prices around the mean. A measure of the variability of the price of an underlying financial instrument, rate, |

| |commodity, or currency. Volatility only measures the quantity of the change - not the direction. Volatility is not |

| |influenced by the direction of the change; it does not matter whether the price rises or falls. Volatility is often used|

| |as a proxy for riskiness. See realized volatility and implied volatility. |

|VRM |See variable-rate mortgage. |

W

|WAC |See weighted-average coupon. |

|waiver |The agreement of a lender to overlook a borrower’s failure to meet one or more conditions attached to the granting of a |

| |credit — conditions that would, in the absence of a waiver, give the lender the right to declare the loan to be in |

| |default. |

|WAL |See average life. |

|WALA |See weighted-average loan age. |

|WAM |See weighted-average maturity. |

|warehouse financing |A form of inventory financing in which goods are held in trust as collateral for the loan. Warehouse financing may |

| |involve the use of public warehouses in which the goods are held in locations owned by third parties. Alternatively, |

| |warehouse financing may involve the use of field warehouses in which the goods are located on the borrower's premises but|

| |are controlled by an independent third party. |

|warehouse lines of credit |An informal name used by some bankers for lines of credit used to finance a borrower's temporary ownership of long-term |

| |assets such as mortgages. |

|warehouse receipt |Written evidence of goods held in a warehouse operated by a third party. The goods may be in a public (i.e., general), |

| |private, or field warehouse. Also known as collateral receipts. The receipts may be negotiable or non-negotiable. |

| |Negotiable warehouse receipts are bearer instruments. A negotiable warehouse receipt can be sold to a buyer who then owns|

| |the inventory covered by the receipt. |

|warrant |(1) An order drawn by a payor directing its treasurer to pay a specified amount to the person named or to the bearer. It |

| |may be payable upon demand, in which case it usually circulates in the same way as a bank check; or it may be payable |

| |only out of certain revenue when and if received, in which case it does not circulate as freely. |

| |(2) A financial instrument that gives the holder the right, but not the obligation, to purchase a specified amount of an |

| |asset at a specified price during a specified period of time. A warrant may give its holder the right to buy shares of |

| |stock, bonds, currencies, or commodities. The major difference between warrants and options is that prices for warrants |

| |are usually published with lists of the prices for the underlying assets. |

|warranty deed |A document that transfers title to real estate from a grantor to a grantee. The distinguishing characteristic of a |

| |warranty deed is that it guarantees the grantor's right to make such a conveyance and that the grantor's title is free of|

| |all liens and debts not specifically disclosed. |

|waterfall |The contractual distribution of principal and interest cash flows in a multi-tranche security such as an ABS, CMO or CDO.|

| |The contractually specified allocation of cash to debt holders and other parties. The priority of payments to holders of |

| |different classes of securities created from a securitization. |

|weighted-average coupon (WAC) |The average interest rate charged to mortgage loan borrowers in an MBS pool weighted by the size of each loan. Individual|

| |loans in an MBS pool will not usually have the same rates of interest. For example, FNMA pools may have mortgages with up|

| |to 250 basis points spread between the highest-rate and the lowest-rate loans in the pool. Investors must remember that |

| |the WAC may change over time as some loans in the pool repay faster than others. Since loan by loan information is not |

| |available, investors must rely on the original WAC throughout the life of the pool. |

|weighted-average life (WAL) |See average life. |

|weighted-average loan age (WALA) |The average number of months since the date of origination for each mortgage in a mortgage pass-through issued by Freddie|

| |Mac. The average is weighted by the size of the loans in the pool. |

|weighted-average maturity (WAM) |The average of the time remaining until the contractual maturity date for the loans in an MBS pool weighted by the size |

| |of each loan. Expressed in months. |

|when-issued (WI) |New securities issues announced by the issuer but not yet sold or issued. Securities may be purchased or sold on a |

| |when-issued basis. Such trades are negotiated on a yield basis since price cannot be determined until the coupon rate is |

| |known. Price is usually calculated for delivery on the date of issue. Many U.S. Treasury securities are actively traded |

| |on a when-issued basis. Some corporate and municipal issues are also purchased on a when-issued basis. Purchasing or |

| |selling when-issued securities is a legitimate and acceptable practice that should not be confused with the related |

| |practice of when-issued trading. When-issued securities trading is the practice of agreeing to buy an about-to-be-issued |

| |security on or after the announcement of an offering and then selling the security before the date on which the |

| |securities are issued and must be paid for. Such transactions are regarded as trading activities by the banking |

| |regulators. |

|whole life insurance |A form of life insurance that applies part of the premium payments to build an investment or savings value for the policy|

| |owner. The investment or savings value is called the cash surrender value of the policy. |

|whole loan pools |Mortgage-backed securities not issued by or guaranteed by a U.S government agency or U.S. government sponsored |

| |enterprise. The mortgage loans comprising whole loan pools are generally loans that do not meet GNMA, FNMA, or FHLMC |

| |requirements. Whole loan pools may be structured as fixed-rate pass-through securities, floating-rate pass-through |

| |securities, or CMOs. Also known as private pools or private label pools. |

|whole loans |A phrase used to describe mortgage loans when the owner of the debt also owns the servicing rights. In other words, |

| |mortgage loans that have not had the servicing separated. |

|wholesale banking |Banking business conducted exclusively or almost exclusively with large corporations, governments, financial |

| |institutions, trusts, etc. |

|WI |When-issued. |

|window |The period of time between the expected first principal payment and the last anticipated principal payment for a specific|

| |REMIC tranche. |

|wire transfers |One of the two major methods of electronic funds transfer. Only the payer can originate the remittance. A wire transfer’s|

| |information format is completely flexible, but this flexibility adds significantly to the bank’s labor costs and results |

| |in much higher fees. |

|with recourse |A lending expression that means the loans or leases that have been acquired from an original lender or lessor are |

| |guaranteed by the originator. |

|withdrawals |1) Any reduction in funds maintained in a deposit account or mutual fund. |

| |2) Funds of a proprietorship or a partnership that are directly removed from the firm by the proprietor or partners. |

| |These are distributions distinct from salary, commission, bonus, or rent payments paid to proprietors or partners. |

|without recourse |A lending expression that means loans or leases that have been acquired from an original lender with no guaranty from the|

| |originator. |

|working capital |In accounting and finance, used to describe the amount, if any, by which a business's current assets exceed its current |

| |liabilities. Also used more loosely to describe the funds a firm has available to run its day-to-day business affairs. |

|working capital conversion cycle |An accounting and financial phrase used to describe the dynamics of short-term cash flows that occur during the normal |

| |operations of a business. The working capital conversion cycle is the circular process of borrowing money first to |

| |purchase inventory, then to carry that inventory and finally to carry the resulting accounts receivable that are the |

| |proceeds of the inventory. When the receivables are paid, the firm can then use the proceeds to either repay the |

| |borrowing or to start the cycle all over again by purchasing new inventory. |

|wraparound mortgage |A second mortgage that takes over the first. The first mortgage loan is not paid off. Instead, the borrower makes |

| |payments to the second mortgage lender for the debt service of both the first and second liens. The second lien holder |

| |then makes the payments to the first lien holder. This type of mortgage is used when the borrower is unwilling or unable |

| |to refinance the first mortgage. Prepayment of the first mortgage may be prohibited or may be subject to high penalties. |

| |Alternatively, the first mortgage may have a very attractive fixed rate of interest. The wraparound arrangement permits |

| |the borrower to leave the first mortgage intact while giving more control to the lender willing to make the second |

| |mortgage. |

|writer |The party that sells an option contract. Also called the option grantor or maker. |

Y

|Yankee bonds |Bonds denominated in U.S. dollars and issued in the United States by foreign issuers for U.S. investors. |

|Yankee CDs |Certificates of deposit denominated in U.S. dollars and issued in the United States by a U.S. branch of a foreign |

| |financial institution. See Eurodollar CDs. |

|yield |The annual return on an investment expressed as a percentage on an annual basis. For interest-bearing securities, the |

| |yield is a function of the rate; the purchase price; the income that can be earned from the reinvestment of income |

| |received prior to maturity, call, or sale; and the time from purchase to maturity, call, or sale. Different formulas or |

| |methods are used to calculate yields. See total return analysis and yield-to-maturity. |

|yield curve |A graph showing the relationship at a selected point in time between the available maturities of a security or similar |

| |securities with essentially identical credit risk and the yields that can be earned for each available maturity. A |

| |graphical depiction of the term structure of interest rates at any given point in time. Yield curves may be constructed |

| |for different instruments such asTreasury securities, AAA-rated municipal bonds, A-rated corporate bonds, etc. Even |

| |within the field of Treasury securities, yield curves are constructed from many different types of Treasury rates. When |

| |a yield curve is constructed by calculating the coupon rates necessary for the Treasury obligations of various |

| |maturities to be priced at par, it is called a par yield curve. When a yield curve is constructed using currently |

| |prevailing rates for instruments available for cash delivery, it is called the spot curve. When a yield curve is |

| |constructed using currently prevailing rates for instruments to be delivered at future dates, it is called the forward |

| |yield curve. When a yield curve is calculated using currently prevailing rates for interestbearing Treasuriy securities,|

| |it may be referred to as a coupon curve. When a yield curve is calculated using currently prevailing yields for zero |

| |coupon instruments, it is called the zero coupon curve. |

|yield curve model |See term structure model. |

|yield curve risk |The risk to a holder of financial instruments that a change in prevailing interest rates will not affect the prices or |

| |yields of the same instruments in exactly equal amounts for each available term. For example, an increase in prevailing |

| |interest rates might raise 3-month U.S. Treasury yields by 100 basis points while 6-month U.S. Treasury yields go up by |

| |only 85 basis points. (In this example, the change to the yield curve would be described as flattening. If, instead, the|

| |6-month rate had risen by more than the 3-month rate, the change in the yield curve would be described as steepening.) |

| |The risk of a nonparallel shift in the yield curve. One of the four primary components of interest rate risk. Sometimes |

| |called yield curve twist risk, twist risk, or rotation risk. |

|yield curve slope |Yield curves also describe the amount of difference between short-term and long-term rates. A yield curve that depicts |

| |the customary situation of long-term rates higher than short-term rates is called an upward sloping or positively sloped|

| |yield curve. A yield curve depicting the less common occurrence of short-term rates higher than long-term rates is |

| |called a downward sloping, negatively sloped, or inverted yield curve. When long-term rates are much higher than |

| |short-term rates, the yield curve is steep. When long-term rates are virtually the same as short-term rates, the yield |

| |curve is flat. |

|yield curve smoothing. |See smoothing. |

|yield curve twist |A phrase used to describe changes in prevailing interest rates that change the shape/slope of the yield curve. For |

| |example, a small increase in short-term rates and a large increase in lon- term rates that occur at the same time. A |

| |manifestation of yield curve risk. |

|yield to call (YTC) |The annual percentage yield of a security calculated using the yield-to-maturity formula but with the assumption that |

| |the security is called on the first call date or on the first par call date. |

|yield-to-maturity (YTM) |The annual percentage yield of a security calculated in a specific manner. The yield-to-maturity is the single discount |

| |rate that, when applied to all future interest and principal payments, produces a net present value equal to the |

| |purchase price of the security. |

|YTC |See yield to call. |

|YTM |See yield-to-maturity. |

Z

|Z bond |See Z tranche. |

|Z score |One of the oldest and most well-known insolvency prediction formulas. The Z score, developed by Dr. Robert Altman, is a |

| |financial model that uses historical financial data to calculate a score. The Z score successfully predicts bankruptcy |

| |with well over 90 percent accuracy using data from one year prior and is over 70 percent accurate using data from as |

| |many as five years prior to bankruptcy. Other financial models claim even higher accuracy levels. |

|Z tranche |A Z tranche is a CMO tranche. With the exception of jump Z tranches, owners of the Z tranche receive no cash flow from |

| |underlying mortgage collateral until the other tranches are retired. During the period when other tranches are still |

| |outstanding, the owners of the Z tranche receive credit for periodic interest. Those credits increase the face value of |

| |the tranche but are not paid to the owners. The Z bond may be, but does not have to be, the last tranche in a CMO |

| |structure that is retired. Sometimes called an accretion bond or an accrual bond. |

|ZBA |See zero-balance account. |

|zero cost collar |The purchase of a floor (or cap) option with the proceeds realized from simultaneous sale of a cap (or floor) option. |

| |The levels of the floor and cap are selected so that the proceeds from the option sold exactly offset the cost of the |

| |option purchased resulting in a net transaction cost of zero. See cap, collar and floor. |

|zero coupon bond |A type of debt security that does not pay periodic interest. Zero coupon securities are bought and sold at prices that |

| |are less than the par value of the securities. The discount, or difference between the principal paid to purchase the |

| |security and the principal returned at maturity, constitutes the investor's return. |

|zero coupon yield curve |See yield curve. |

|zero-balance account (ZBA) |A cash management service offered by banks. A bank checking account that can accept deposits and/or make disbursements |

| |but that is always maintained at a zero balance. The zero balance is maintained by transferring just enough funds from |

| |or to a concentration account to offset each day’s activity. The concentration account is sometimes called the parent |

| |account and the zero-balance account is sometimes called the daughter or subsidiary account. |

|zeros |See zero coupon bond. |

|zoning |A designation given to a particular geographic area by the local government to regulate the type of use and the density |

| |of development permitted for properties in that area. For example, areas may be zoned to allow only residential |

| |development. |

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